Freeport-McMoRan Inc. (NYSE:FCX) Q4 2014 Earnings Conference Call January 27, 2015 11:00 AM ET
Executives
Jim Bob Moffett - Chairman
Richard Adkerson - President & Chief Executive Officer
Jim Flores - President & Chief Executive Officer, Freeport-McMoRan Oil & Gas
Kathleen Quirk - Executive Vice President & Chief Financial Officer
Analysts
Michael Gambardella - JP Morgan
Tony Rizzuto - Cowen and Company
Sal Virani - Goldman Sachs
David Gagliano - BMO
Brian Yu - Citi
Oscar Cabrera - Bank of America
John Tumazos - John Tumazos Very Independent Research
Nathan Littlewood - Credit Suisse
Steve Bristo - RBC Capital Markets
Jeremy Sussman - Clarkson
Garrett Nelson - BB&T Capital Markets
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Q4 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. Welcome to the Freeport-McMoRan Q4 2014 earnings conference call. Our results were released earlier this morning and a copy of the press release and slides for today’s call are available on our website at www.fcx.com.
Our conference call today is being broadcast live on the internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today.
Before we begin our comments we’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements and actual results may differ materially. 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 Form 10(k) and subsequent SEC filings.
On the call today are Jim Bob Moffett, Chairman of the Board; Richard Adkerson, Vice-Chairman, President and CEO; Jim Flores, Vice-Chairman and CEO of Freeport-McMoRan Oil & Gas; with several other of our senior team here today joining the call.
I’ll start by briefly summarizing our financial results and then turn the call over to Richard who will review our recent performance and outlook using the slide materials that are on our website. As usual after our remarks we’ll open up the call for questions.
Today FCX reported a net loss attributable to common stock of $2.9 billion or $2.75 per share for Q4 2014. There are a number of special items in the quarter which are detailed in the press release.
The net loss attributable to common stock included net charges of $3.1 billion or $3.00 per share in Q4, primarily associated with a reduction in the carrying value of oil & gas properties pursuant to SEC full cost accounting rules; and goodwill impairment charges as further detailed in the press release. These were partly offset by noncash marked to market gains on oil & gas derivatives contracts and a net gain from the sale of the Candelaria and Ojos mining operations which were completed in Q4.
Copper sales totaled 972 million lbs. in the quarter and 3.9 billion lbs. for the full year. Gold sales were 377,000 oz. in Q4 and 1.25 million oz. for the year 2014. Our oil & gas sales totaled 12.1 million barrels of oil equivalents in Q4 and were 56.8 million barrels of oil equivalents for the year.
Our average realized prices for copper during the quarter were $2.95 per lb. - that was below the year-ago period of $3.31 per lb. Gold prices averaged $1193 per oz. below last year’s Q4 of $1220 per oz., and our average realized price for crude oil in Q4 was $78.02 per barrel, which included $7.77 per barrel of realized cash gains on derivative contracts.
Operating cash flows for the quarter totaled $1.1 billion. Capital expenditures totaled $1.8 billion. As previously announced we completed the sale of our interest in Candelaria for $1.8 billion in cash during November. We ended the year with total debt of $19 billion and the consolidated cash position totaled $464 million.
Now I’d like to turn the call over to Richard who will be referring to the materials in our slide presentation.
Richard Adkerson
Good morning everyone, and we’re thinking about all of you on the East Coast dealing with this snowstorm. It’s even raining here in Phoenix so it’s a strange year in a lot of ways.
We’re going to focus today on our company’s response to the new commodity price environment we’re having to deal with. The situation we face now in some ways is mindful of 2008 when the price of copper dropped 60% in just a quarter and a half. Beginning midyear in 2014 we saw the significant drop in oil prices, and oil dropped about 50% during 2014. Then in Q4 we saw copper prices drop, and copper prices dropped almost 20% in Q4, and then going into this year we’re seeing further drops.
Now, what does this mean to us overall? One thing, we’re having to change our focus from our previously stated debt reduction targets by 2016, because under these commodity prices those targets are unrealistic. We will be seeing higher cash flows from our mining business as we complete projects and add volumes and reduce CAPEX, and we see 2015 as a bridging year to get us to higher cash flows that we have before us - even without increases in commodity prices.
We want to emphasize we’re not backing away from our objectives of reducing leverage, and going forward we’re going to continue to prioritize debt reduction. We have a track record as a company of taking necessary actions and executing plans to maintain financial strength during periods of weak commodity prices, and that’s what we want to talk about today.
We’re prepared to deal with whatever commodity price environment we have to live with. In many ways there’s a disconnect today, kind of unlike 2008, between the current fundamentals of the marketplace and what we’re seeing with commodity prices. But the market is what the market is and we’re not developing plans that are based on an assumed near term quick recovery in prices. So that’s kind of setting the stage for what we want to talk with you about today and we’ll be prepared to answer any of your questions about it.
Turning to Slide 3, we have made good progress in this moving towards achieving higher volumes from our business. The Morenci expansion is complete following the completion of the Tenke expansion earlier and the Morenci is expected to reach full rates in Q1 this year. The Cerro Verde expansion is physically more than 50% complete. We’ve incurred a lot of the costs and contracted for other costs. We have a substantial construction project going on there. To date it’s going well and we’re targeting a 2016 start date at Cerro Verde.
The Lucius project operated by Anadarko that we’re a significant investor in has achieved its first oil production this month. We had a successful production chest at our Highlander project in south Louisiana that Jim will be talking about and positive drilling results in our deepwater projects at Holstein Deep and Power Nap.
As we previously reported we completed the sale of our Candelaria project in Chile. We had a successful $3 billion senior note offering which essentially allowed us to repay all of our 2015 maturities and also to retire some higher coupon debt.
We are today talking about a plan to take aggressive actions in response to these commodity prices. We are cutting our capital expenditures in 2015 by $1.5 billion - that’s over a third decrease in our oil & gas CAPEX. And we engaged in a process to obtain third party funding for some of our Gulf of Mexico development projects - things that this company has done before. And we’ll be talking about how we’ll be using that to mitigate our capital expenditures further.
Kathleen reviewed the financial highlights on Page 4 and I won’t repeat those. Those are there for your purposes. You can see that our unit cash costs are in line with our guidance for the year, about $1.50 per lb.
Turning to Page 5 I mentioned the status of our expansion projects. The three projects that we undertook to substantially increase our volumes are on track. Our capital expenditures will be declining. We’ll have substantial free cash flows beyond 2015.
And in the oil & gas business we’ve had strong operational performance. Our efforts continue to identify substantial resources that will be the basis for future growth with lower risk development opportunities, and we’re reducing spending in response to today’s conditions without eliminating that opportunity for future growth. And you can see in these charts just how significantly, suddenly and recently commodity prices have dropped.
We had roughly two years of copper prices that bounced around between $3.00 and $3.50 before this drop; we had three years of oil prices where Brent was over $100 and then this sudden change, as I said, in many ways appears to be disconnected from the current fundamentals of our business.
Note on the copper chart on the left side of the page our stock price of course directionally follows the movement in copper prices. But I think the global exchange stock is one indication of this disconnect between today’s prices and fundamentals. Historically in weak economic times exchange stocks and inventory sales by consumers will be increasing, and today while we’ve seen a recent growth with a small uptick in global exchange stocks they’re still low by historical perspectives - and certainly not rising to the point that would indicate a drop in prices like we’ve seen.
Page 6 talks about what our current focus is and that’s protecting our balance sheet. We’ve completed $5 billion of asset sales, we’ve reduced CAPEX. We’ve, as I mentioned, did this bond financing to strengthen our liquidity. We are continuing as we speak today to work with our management team and we’ll be working hand-in-glove with our Board on a real time basis as we go forward in 2015 to decide what further actions need to be taken.
We’ll be monitoring the state of commodity prices, the performance of our business, how we’re doing in terms of meeting these plans, completing our project at Cerro Verde for example. We are looking for partners to help provide funding for our CAPEX in the Gulf of Mexico as I mentioned. We’re working with our bank group and holders of our bank term loans about dealing with issues that would further improve our financial flexibility. We’re in good shape now but we want to make sure that we’re taking every step to stay that way as we go forward.
In Indonesia as we work with the government to get our contract of work issue resolved, we just this week signed an extension of the MOU that we had signed last July. And in that MOU we responded to a very strong position of the Indonesian government about the advancement of development of a smelter in Indonesia. And we are working with partners and with site preparation and construction plans to go forward with that, in conjunction with getting a resolution to our contract situation.
As we look forward it’s what we are planning to do - we are presenting a plan for you here today. And that plan involves reduced CAPEX, reduced costs and pursuit of capital expenditures where it’s economically rational for us to do so. The plan we’re presenting to you today includes a continuation of our current cash dividends to our shareholders. We’ll be working with our Board to review all aspects of our financial policy and our financial planning as we go forward. And I think you can judge from our past history that our Board’s going to be prepared to do what’s necessary to protect the liquidity of this company.
Page 7 shows the cost reductions and deferrals that our plan today involves: a significant reduction of $1.5 billion in capital expenditures with $1.2 billion of that coming in the oil & gas business. And we’re taking advantage of every opportunity that we can of achieving cost reductions in all of our global operations. Particularly in our mining business lower oil prices is leading to lower costs, and also lower commodity prices in terms of some of our input costs is also giving us the opportunity to achieve a lower cost structure. And we’re going to take every advantage of that that we have.
The strength of this company, the strength of Freeport-McMoRan lies in our long term assets, and those remain in place. And as a company we remain highly positive about the future outlook of our business even as we deal with the current situation. We have substantial long lived reserves both in our mining business and our oil & gas business. These reserves are in a diverse portfolio of world-scale copper assets and a strategic position in the Gulf of Mexico, taking advantage of existing underutilized and well-placed infrastructure. We have a very large, valuable resource potential.
In copper we have over 100 billion lbs. of proved and probable copper reserves at $2.00 copper, and roughly that same amount of mineralized material at a $2.20 price range, and additional resources beyond that. So we have within our company the resources for long term profitability and growth; and in the same way the oil & gas business, our resource base is very large and gives us a basis to have future growth there.
Now talking about the copper business, you know, I referenced the fact that there’s an apparent disconnect now between the copper price and market fundamentals. Clearly the market is trading on the basis of the oil price decline and the impact generally on commodity prices. Traders are looking at the relative values of metals in relation to oil; they’re looking at the relative value of copper in relation to other metals. And what we’ve seen is a significant decrease in prices, but inventories remain low; the fundamentals of our business in dealing with customers remains relatively strong.
The market is relatively tight, and from a supply standpoint the consensus expectations of very large surpluses that were expected in 2014 have not materialized. The surplus expected in 2015 appears to be much smaller than anticipated. Supply is coming on slower; disruptions are more frequent. And beyond 2016 the market remains to be uncertain.
All of this reflects the global macroeconomic, political uncertainty that we see around the world. China is in a slower situation but the government is responding with economic stimulus. And in fact there’s a lot of positive things in China. Imports rose by 12% year-on-year in 2014 and set records at the end of the year. Domestic cathode production set new records in November and December. State grids announced an increase of 9% in their spending next year and so even though China’s growth rate is slowing it’s still consuming a lot of copper.
In the US the fundamentals are stable. Despite the price volatility our customers are continuing to have confidence in their business going forward. Supply side issues still significantly underlie this market. As I said, the forecast for large surpluses has not materialized. Exchange stocks are low. New projects are facing delays. As you read Q4 earnings reports and announcements you’ll be struck by the number of production declines that are being announced around the industry.
Grades are falling; people are constraining CAPEX - all of this will be very supportive of copper prices as we go forward. Lower prices is taking a lot of scrap out of the marketplace and that’s going to be supportive of prices. So we continue to see long term fundamentals. The stronger dollar is an issue for the marketplace and that’s one thing about it.
Now, I want to refer to Page 10 which is a chart I’ve used before, but just to put all this in perspective about what the world is going to need for copper. The top chart is total copper consumption - this includes consumption of directly used scrap in addition to consumption of refined metal. And if you assume a growth of 2.5% over the next ten years, and that embeds a growth rate in China that’s half of the growth rate of the last ten years, the market is going to require another 7.6 million tons of copper. And over this same period existing mines are going to decline. Brook Hunt expects existing mines to decline by over 3 million tons.
So that’s 10.7 million tons shortfall that’s going to need to be made up over the next ten years by expansions, new projects and scrap. To put that number in perspective, in 2014 the top ten mines in the world are estimated to produce less than 5 million tons. So the requirements for the next ten years are twice the annual production of the ten largest mines in the world. We have to get through this current situation but the fundamentals of our market are very positive and we’re very optimistic about it.
Page 11 shows our mining unit production cost experience for Q4 - roughly in line with what we had guided to in our Q3 earnings release. It does reflect the sale of the Candelaria operations in early November and it does reflect in Indonesia some higher royalties and export duties that we have agreed to pay in connection with these MOUs that we signed. But you can see that our cost experience continues to be positive.
Cerro Verde is in the stage of full-blown construction now. We have 12,000 to 14,000 workers there to have a project that will be the world’s largest concentrating facility. The construction is advancing and is expected to be completed late in 2015, and we’ve incurred roughly three-quarters of the cost of the project to date. As we look at constraining capital quickly it was clear that delaying Cerro Verde was not economic for our company because of the stage of the project, the amount of money that’s spent and the coming volumes beginning in 2016 and going forward. We’re going to be focused on managing the completion of that project.
In Indonesia we continue to engage in active discussions with the new government being led by Joko Widodo to amend our contract or to extend our right to operate beyond 2021, the expiration of the existing contract or the initial term of the existing contract. We’ve approached this process with an aim of keeping a positive long term partnership in Indonesia. We’re focused on working with the government for the economic development of Papua and to provide significant benefits to the overall Indonesian economy.
Our existing contract continues in place as we speak and we are focused as we go forward in being responsive to the aspirations of the government, the people of Indonesia; and taking into consideration our need for assurance of legal and physical terms to support the major investments that we’re making. The MOU that we signed last July has been extended until July 2015. We this week got an approval to continue to export. We had a six-month license which needed to be renewed and it has been renewed, and as I mentioned we’re advancing plans for the new smelter project in parallel with our [inaudible] amendment and we’re all focusing on Papuan development during this process.
At Grasberg we’ve completed development of the access to our underground ore bodies and are continuing with the development of the Grasberg Block Cave and Deep MLZ mines. So development capital of almost $3.0 billion has been spent to date and in total $2.3 billion from Freeport, and our share of development capital is expected to average $700 million a year over the next five years. This is an important project as this replaces the production coming out of the Grasberg Pit. The Pit is now expected to extend until the end of 2017 roughly - that’s been delayed somewhat by the labor issues we’ve faced in recent times. Just let me say we’re making progress with those now and expect during Q1 to return to normal levels of operations.
While we’re not spending significant capital on further development projects in the mining business we are continuing our studies on the potential for a very large scale expansion at El Abra, for the further expansion of our Tenke Fungurume project in The Congo where operations are going well and we have a resource that provides us optimism about future long-term growth; and in our US mines where we have large sulfide resources in our Bagdad mine in northwest Arizona and the Safford Lone Star mine where we have an enormous resource. All these things are the future for our company and we’re continuing studies without spending current capital on the projects.
Jim, I’ll turn the mic over to you and let you talk about our oil & gas business.
Jim Flores
Thank you, Richard. Good morning. 2014 was an outstanding year operationally for the oil & gas business, primarily Q4. We successfully rotated out of the low-margin shale project. We had one of the better shale plays out there in Eagleford and now they’re under a lot of pressure obviously with the low prices. In that rotation we were able to increase interest in our high-margin areas like the Gulf of Mexico, mainly increased interest in Lucius and Heidelberg.
We had excellent revenues during the year of $4.1 billion, cash operating margin of 2.9% and almost 57 million barrels of oil equivalent in production and sales in 2014. The drilling results we had in Q4 were mainly successful - Holstein, Deep Dorado, King and Power Nap were all four significant new development opportunities for our company. They’re also the first three truly development projects adjacent to our world-class infrastructure in the Gulf of Mexico that gives us all the operating leverage and the high margins to our business.
The aspect of the long-term play of Freeport-McMoRan Oil & Gas of developing resources in and around our existing infrastructure and driving production and reserves higher, while reducing our costs - because most of our costs there are fixed - is off to a great start. Although we’re obviously going to take action here to reduce our CAPEX exposure because of the low commodity prices, operationally the plant’s working just perfectly.
On the ILT, Inboard Lower Tertiary crustaceous, our significant discovery in Highlander - we were able to float test the Highlander well at 43.5 million cubic feet of gas per day, the first production below 29,000 feet on the Gulf Coast onshore. And we were able to prove that we have a large gas reserve there in Highlander, and I’ll talk a little bit about that going forward. In California we had excellent execution, drilled over 107 wells with over a 100% success ratio as expected.
So all in all we were rolling out of ’14 looking forward with a lot of optimism to ’15 until Page 17, the price of oil fell out of bed and the market’s gone down 50%, 60%. This was unexpected from a lot of people’s standpoint. We thought oil would get a little soft but we had no idea it would find a mind of its own and create this kind of calamity. The oil & gas market is under severe stress.
Our business is as healthy as anybody’s out there because of the rotation out of the shales and so we actually have economic projects to go forward on. At the same point in time, with our cash flow impaired and the ability of the company from a standpoint of funding its obligations, we need to raise some capital. And the way we do that is take our development projects and find outside funding, just like we did in 2008.
You’ll see the drop - in 2008/2009 we were in the same situation and we took our Lucius project, right after the financial crisis, and we were able to do some project financing there. It’s a nice rate of return for our investors as well as us, and we basically got 75% of the project free of charge going forward. And it just came on production as Richard said in January of this year.
So we’re going to repeat that financing going forward, and the only way we can do that is because of the strength of economics of the project and the operational leverage tied back to our facilities to where investors feel like they have a great shot at buying oil low with good execution, and being part of a great project that’ll enjoy prices at a higher level in the future. So we’re in a unique position to raise that funding, and also having done it before I’ll go over the Lucius case study in a second.
The other operational highlights, the steady production from Point [Inaudible], California - we’ve completed our maintenance at Marlin, we sold 12.1 million barrels of sales in Q4. Cash operating margin was about $0.5 billion and $64.0 million worth of debt hedge realizations with our hedge book that does extend into ’15, with I think the mark on that is about $500 million in the positive right now.
Responding to market conditions we’ve gone onto a significant capital reduction of 34%, $1.2 billion of announced CAPEX cuts. That’s basically from our previous $3.5 billion budget to $2.3 billion. And when you’re making these budgets based on risks/success, when you go through a Q4 where every well works you obviously expect your budget to increase the following year. So it’s a direct $1.2 billion discount or reduction in CAPEX, 34%, but in real terms it’s probably much higher than that based on the success and the development that we’ve caused because we obviously at it risked in our budget. It all rolls over into a 43% discount in our capital spending in 2016 of $1.7 billion.
Now the development joint ventures we’re going to be talking about will be in addition to these reductions and we’ll go through that, and that’s where we’ll talk about deferring our discretionary spending. We’ll focus on our highest priority projects. Anything marginal, anything discretionary or anything kind of out on the front tier has been shelved. And when you reduce spending this much you slow growth and you preserve the resource value for the future and better prices, when economics are better. It’s just a function of reducing capital and reducing activity, and then lever the past successes therefore for funding arrangements.
And that’s what Page 20, the Lucius case study, is all about. We had discovered Lucius, drilled a couple delineation wells and established a reserve, and we basically project financed it with $450 million of 8% convertible preferred into 20% equity positions. We warranted everything else and it ended up being about 25% at the end of the day, and with a $300 million bank revolver at the subsidiary level. That allowed us to fund all of the development at Lucius. It basically came in on time and on budget. And this is where we had a third party operator, it was right after the financial crisis and at the time we did the funding the moratorium for drilling in the Gulf of Mexico was still in place post the Macondo spill.
This situation we have going forward, we have projects that come on in 18 to 24 months, that come on much faster. We’re the operator; we own 100%. We have the equipment in place, the plan in place to execute on so we’re in a much better position physically and operationally and interest rates are much lower to repeat this financing going forward.
We had these thoughts in mind anyway going forward because we had sold our Eagleford production and our cash flow was going to be down in the oil & gas sector of our company, so we just accelerated those plans. We can do this multiple times. We’re going to do it at Holstein and Heidelberg - those are the two developments we’re going out with first. Then we can do King and Marlin and then Power Nap. We can continue every successful resource we establish, we can project finance this. We think it’s at very favorable rates to the company and really highlights the true value of our exploration business to our company rather than just developing reserves on our balance sheet to be able to leverage that part of the business.
Page 21 is the list of these projects we’re talking about. Holstein Deep and Heidelberg, one’s green, one’s blue will be in our initial joint venture. We’ve already done Lucius and then we have in the black Dorado, King and we expect to drill Kilo Oscar and the rest of them in mid-2015. Power Nap is part of our Vito project which is a great validation of our Vito acquisition last year. It’s the first exploratory well out of that strong portfolio that has found some fantastic reservoirs. So we’re off to a great start establishing our inventory for our development joint ventures in the Gulf to drive those high returns to shareholders.
I mentioned earlier about the Inboard Lower Tertiary crustaceous update at Highlander. This is a significant geologic and engineering milestone. It is still producing gas below $3.00 so economically challenged, therefore we’re idling most if not all of this activity this year to see what happens with better gas prices. The Highlander well should be on here in production in Q1 - we’re going to be monitoring that closely and pressures and so forth. But all indications are we have truly validated a significant reservoir in the gas business but we need better economics to go the width. And obviously the best economics, the best cash flow are going to be on the oil side of our business in the Gulf of Mexico.
So a great success to the team. It’s been a long time coming on the flow test and the success, and then we’ll deal with it and develop it when prices are a little bit better. Richard?
Richard Adkerson
Alright, thanks Jim. Now before we get to questions we’ll take a view of our 2015 outlook. On Slide 23 is our sales outlook which is for copper, gold, molybdenum and oil consistent with our previous guidance. Unit costs of $1.53 for copper, $18 a barrel equivalent for oil is also consistent.
Operating cash flows, we’ll show a further analysis of this: at $2.60 copper and $50 oil our plan would provide $4 billion of operating cash flows. Each $0.10 of copper is $350 million variance in that.
Our current plan for capital expenditures is $6.0 billion. That’s a reduction from $7.5 billion of earlier guidance, and this does not reflect the participation contributions to be made under these arrangements that we’re currently pursuing that Jim talked to you about, where we’re looking for partners and project-type financing to come in for our developments in the Gulf of Mexico.
Page 24 shows our production outlook and I mentioned earlier the growing volumes that we’ll be seeing in our business beyond 2015. 2015 shows $4.3 billion growing to $5.4 billion. You can see increasing volumes of gold as we get closer to the bottom of the pit, or completing mining at Grasberg; and our volumes for molybdenum and oil & gas sales.
Quarterly sales this year: Q1 is expected to be our weakest quarter from a volume standpoint. That’s just a function of our mine plans and is a ramp up of our labor issues, but by the end of the year we would see increasing growing copper sales throughout the year.
Our sales by region are shown on Page 26. The growth in North America is primarily Morenci, the decline in South America primarily reflects the sale of Candelaria. And you can see Indonesia growing as results of improved productivity from our labor group.
Our unit costs for 2015 are detailed on Slide 27. Notably we see a decrease in our site production delivery costs on a unit basis from $1.90 to $1.81, but that is offset by higher royalties and export duties in Indonesia - but still at a very attractive rate in the $1.50 range.
Now, EBITDA analysis, cash flow analysis is shown on Page 28. We show a variation, again with oil at $50 and copper varying between $2.50 and $3.50. This is an average of 2016 and 2017. You can see cash flows of $6.4 billion a year average at $2.50 and over $8.00 billion at $3.00.
Sensitivities are on Page 29. Our biggest sensitivity of course - copper price. A $0.10 change is $350 million in cash flow. For oil, $5 is $150 million in cash flow. So those are going to be key factors we’ll be watching as we go forward.
Page 30 shows our declining capital expenditures going from projected $6 billion in 2015 to just over $5 billion in 2016. Again repeating this does not reflect the plans that we’re on right now to have a significant portion of these cash flows in the oil & gas business fund through participation by third parties. So that is our plan.
I mentioned earlier our strong commitment to strong balance sheet management. At year end we had no borrowings under our $4.0 billion bank credit facility. We also have a separate $1.8 billion line of credit at Cerro Verde to help fund that project along with the cash flows that the project is generating from its current operations. We had $425 million drawn under that separate facility at the end of the year but that’s another aspect of our balance sheet management.
We have a strong resource base, strong cash flows and capital discipline. We’re taking the steps already to deal with this current situation and we’re going to be responsive to what we have to deal with. And as I said, this is going to be a real time effort, working hand in glove with our Board to make decisions as we go forward.
In summary we want to protect our balance sheet and liquidity and we’re going to complete our near term mining projects, continue with our oil & gas investments where that makes economic sense; work on these third party investments - with the primary goal, the imperative of preserving this really attractive and large long-term asset base for the future benefit of our company.
So with that we will open the line for questions. And Jim Bob, Jim and I are here with Kathleen to respond to whatever questions you might have.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Our first question will come from the line of Michael Gambardella with JP Morgan. Please go ahead.
Michael Gambardella
Yes, good morning, Richard. In the past, I mean since you made the oil & gas acquisitions a few years back you’ve consistently said that the oil & gas part of your business would be self-funding. And I know you talked a little bit about how you’ve done some of those things in the past, but do you still think you’ll be self-funding for 2015 given what you see right now? And how specifically do you plan to address that?
Jim Flores
Mike, this is Jim. That’s a target. It’s going to be difficult to be totally self-funding with the horrific drop in prices. And our plan was to be self-funding to replace the revenues that we did not have in 2015 due to the sale of the Eagleford. So we’re moving toward additional funding sources and so forth, but it’s going to be a challenge to make it dollar for dollar. Hopefully we can raise about $900 million in this first development joint venture off of the $2.3 billion to get close to it. And I know even though it’s January I’m optimistic we can get another one done as well but we’ll see what the market holds. But we’re going to try to offset as much as we can.
Richard Adkerson
And Mike, I mentioned here in my comments that we’re seeing, we’re having to deal with this sudden change in the cash flows from just how quickly prices are moving - not for oil & gas but also for copper now. And 2015 is a bridge year. I mean we’re going to have higher volumes in 2016 so the way we’re thinking about this issue for our goals for oil & gas planning and so forth, and managing our balance sheet is really how we deal with this over a two-year period.
We have the financial flexibility to do it but that’s really the focus of where we’re getting to. And we’re going to be monitoring, see what prices do and so forth but that’s really the way we’re looking at it. That’s our long-term goal. Our long-term goal remains for oil & gas to be self-funding, and as it builds assets along the run with success it’s going to be generating substantial cash flows.
Michael Gambardella
And could you talk a little bit, just staying on the oil & gas side, how you could turn the growth back on for oil & gas because you’ve cut it pretty dramatically here?
Jim Flores
Well, the outside funding as I said - that turns the growth back on. We share some of that growth so it’ll be muted, but say it’ll be 75% of the growth that we had before once we’re able to secure these financings and show some visibility there. So by year end we could have a couple of these things done and be turning growth back on, but it wouldn’t be as high as it was before because obviously we’re sharing some of that growth with our investors that are putting up the money.
Michael Gambardella
Right, okay. Thank you.
Operator
Your next question comes from the line of Tony Rizzuto with Cowen and Company. Please go ahead.
Tony Rizzuto
Thanks very much and yeah, it is good to see the response to these deteriorating market conditions. And just a follow-up to Mike’s, thinking about on the mining side are there other mining assets that you deem to be non-core in nature?
Richard Adkerson
Well Tony, when you look at our mining assets the bulk of those assets are existing producing mines that have significant undeveloped resources that we believe are going to be much more valuable in the future. The reason for selling Candelaria was it was not one of those mines - it was very good operation, good production, fully developed, but it did not have the significant undeveloped resources that we have at El Abra, Peru, Tenke and Cero Verde or in our US assets.
So in that sense those assets, the bulk of our assets would be viewed as core and important for our business. We do have some older mines in New Mexico; we’re mining some at Miami, we’re completing that. But those are really operations that we are mining to manage our reclamation obligations and so forth.
Now we do have in the plans for dealing with our situation in Indonesia plans to divest interest in PTFI over time. We’ve indicated to the government that we would increase the Indonesian ownership in Indonesia to 30.00% - it’s currently 9.36%. Exactly how that will proceed is dependent on our progress with this MOU. The first step is to offer it to the government; we’ve talked about the possibility of listing on the Indonesian exchange but that is one area of divestment.
Interest in our mining assets is strong. We would have the option of selling interest in those assets if that’s what we decided we want to do, but they are core to our future.
Tony Rizzuto
Okay. And just a follow-up here: how important is maintenance of the dividend at the current level? You talked about the bridge year 2015 in some previous conversations, and you obviously have some flexibility around that but just can you give us a little bit more color on how you view the maintenance of the current level of the dividend?
Richard Adkerson
Well Tony, this is a Board decision, and as I said we’re going to be working very closely with our Board on a real time basis as we go forward. We have developed a plan now that includes the preservation of the dividend. There’s uncertainties about the future of commodity prices and there’s different views about whether prices are going to rebound in the near term, the medium term or you know, there’s talk about oil prices staying low or weakening.
So all of those things are things we’re going to have to work with our Board and keeping our finger on top of it, and that is going to be a decision that the Board would make. And all I can say is right now we’ve developed a plan that preserves the dividend in this plan, and our expectation is the Board’s going to take steps to preserve our liquidity as we go forward. We all want to keep the dividend and we’re going to work hard to try to do it.
Tony Rizzuto
Okay, Richard. And just a follow-up on a question for Jim. Jim, it sounds like the plans at least for the first tranche, the first funding might be pretty advanced at this stage. Is that a fair assessment?
Jim Flores
Tony, the success we’ve had in the past we’ve got great partners, we have a lot of interest. And mainly because you think about what oil properties out there in this vast array, just take North America, that actually have economics at these levels. They’re not the shales. And they’ve had so much capital going. There’s a tremendous amount of private equity capital that’s unused out there. I think [inaudible] was telling me as much as $100 billion of unused capital and fresh capital that’s just been raised.
There’s a lot of mezzanine capital and a lot of counter-cyclical investors that want to do just like we did at Lucius, is buy oil when it’s $50. So the meeting schedule is robust and we’re not ruling out international players, [inaudible] for those types of things but having done this and having the makeup of our properties where we 100% control, operate - they’re actually producing now. Taking away a lot of the operating risk and timing risk with these larger projects is key to attract the financing.
So we’re just going to be arguing about how much we give up as a company and how much the investors need to get their returns, and that’s a good, healthy argument for a good transaction I think. So we are hitting the ground running, and just think about this as a multiple way of financing - and irrespective of where oil prices are it still gives us the best rate of return as a company, of identifying these assets and then financing the development with third parties to drive higher returns for FCX. So we had these thought processes in mind and they sure come in handy when prices do what they just did.
Tony Rizzuto
Alright, very helpful. Thank you very much, gentlemen.
Operator
Your next question comes from the line of [Sal Virani] with Goldman Sachs. Please go ahead.
[Sal Virani]
Thank you. Richard, can you give us an idea of your write down between the gas and oil assets or MMR and PXP? How was it distributed?
Richard Adkerson
We follow full cost accounting, Sal, and under full cost accounting the original acquisition cost of both PXP and McMoRan went into a full cost pool. And then as we go forward all costs of exploration and development of oil & gas reserves go into that single pool. So all the costs are kind of like a MixMaster - they just get all blended together and then they’re subject to a ceiling test that’s prescribed by the SEC that puts a limit on how much of those costs can be capitalized.
And so in our write down there’s two aspects to it. First of all, the cost in excess of this SEC ceiling amount has been written off, and then in addition there was goodwill assigned to the oil & gas assets and all of that goodwill has been written off. So it’s not possible to distinguish it between McMoRan and PXP, and this of course is a function of pricing. Under the SEC rules, they currently require that the prices use for these full-cost ceiling tests be a trailing twelve-month average.
And so in our ceiling test those costs, the oil price that was used was roughly $90 - it’s $95 actually Kathleen’s telling me. And that’s because that’s a twelve-month average. And as we roll into 2015 as we talk about in the press release and if prices stay low that average is going to come down, and that would be indicative of further full cost write offs going into 2015. All the goodwill is gone so it’s just a question of the ceiling test.
[Sal Virani]
Okay. And also the cost decline on the units, the gross cash costs you have from ’14 to ’15 - I’m talking about the site production delivery costs, $1.90 to $1.81. Is that all coming from the lower fuel or is there anything else in there also?
Richard Adkerson
No, lower fuel is a factor but of course lower energy costs rolls into all other costs - you know, logistics and things like that from suppliers. But with commodity prices dropping, some of our costs are related to steel, for example, the steel balls that we use in our grinding processing facilities, you know, component parts for maintenance, truck tires. Across the board this change in the commodity price environment is affecting costs, and one of the things we’re doing is trying to make sure we take full advantage of that.
Kathleen Quirk
Sal, further to that we do forecast here the significant benefit from lower diesel prices. Offsetting some of that is we do have higher consumption as we’re mining higher rates, productivity improving in Indonesia; we’re mining higher rates at Cerro Verde. So we do have some consumption offsets; and then offsetting that we do have some improved volumes. So you net all that together and you see the decline from $1.90 to $1.81.
As Richard talked about we believe there will be some additional benefits from other commodity index-types of costs which we’ve reflected some of that in this plan. But we expect to see, if commodity prices stay low we expect to see additional savings as we go throughout the year.
[Sal Virani]
And lastly, Kathleen, can you give us an idea of your appetite for increased debt and how the rating agencies would look at it you think?
Richard Adkerson
For increased debt?
[Sal Virani]
If you need to. If the commodity prices remain low and you need to borrow some money to care for the shortfall, what is your appetite for that?
Richard Adkerson
Well, our plan is to manage our business so that we don’t increase debt. I mean we’re going to take steps as we can to improve the maturity schedule of our debt. There will be times because of the nature of our business that we’ll have some draws under our bank credit facility, so you know, that’s what our credit facility is for is to give us bridges to deal with short term issues - whether they come up from business risk or so forth.
But in terms of thinking about substantially increasing our debt level over time, that’s not what we’re focused on. We still, as I started out saying we have plans of reducing our debt level - we’re just not going to be able to do it within the timeframe that we had originally targeted.
Kathleen Quirk
And 2015, Sal, is that bridging year in terms of getting to the point where we see free cash flows, substantial free cash flows coming out of the mining business, and then we’ve got these initiatives underway to offset some of the CAPEX in the oil & gas business. So you might see some increase in ’15 but that is not our plan. Our plan over time is to take leverage down.
Richard Adkerson
And you’ve all seen that the credit rating agencies are focused, as you would expect them to be, on lower commodity prices. And we’re working with them and we’re working with a plan to do everything we can to preserve our credit ratings.
[Sal Virani]
Great, thanks very much.
Operator
Your next question comes from the line of David Gagliano of BMO. Please go ahead.
David Gagliano
Hi. I just have a few quick clarification questions really. First of all, does the oil & gas production targets, do those include an assumption of project financing?
Jim Flores
No they do not. That will be added once we get the financing secured.
Kathleen Quirk
The CAPEX and the production are both aggregate with no partner.
Jim Flores
With no partner at this point, so that’s a baseline and you can build from there as we announce things.
David Gagliano
Okay, great. And then the operating cash flow numbers, are those before or after a minority interest payment?
Kathleen Quirk
Those are before. The minority interest payments will come out of financing.
David Gagliano
Okay, great. Okay, fair enough. And then the last question: does the CAPEX reflect any expectations for expenditures potentially for a smelter in Indonesia?
Richard Adkerson
No, they’re currently not in there. Our plans would be to develop as we did with the smelter that we developed in the mid-1990’s, to do a structured financing for that project which would be based on contracts with TCs and RCs. And it would be a PTFI-type contract for processing fees that would provide the basis for financing. And then the amount of equity that would be required depends on the participation of the partners that we’ve put together with it. But it is not in there at this point.
David Gagliano
Okay, great. Alright, that’s all I had. Thanks.
Operator
Your next question comes from the line of Brian Yu with Citi. Please go ahead.
Brian Yu
Great, thanks. Good morning. I have a couple questions on oil & gas. You’ve taken the CAPEX expense down to about $2.3 billion annually and then at the same time the production outlook’s been dropped to about 56 million, 57 million barrels. The math on that implies $41 per BOE of CAPEX. Is this a reasonable measure of sustaining CAPEX for the business, $41 BOE?
Jim Flores
No, because you’ve got different complexions of what’s being spent and what isn’t because a lot of the wells that are being drilled are being hooked up timely. So you’re getting a muted production number. I would use closer to $30 is probably a reasonable run rate under our non-stressed scenario, and Brian, that’s basically what happens when we bring in third party financing - we drop that number from $30 to $20 and get our costs in line with a $50, $60 oil environment. So that highlights the goal of what we’re trying to do with the financing, but $30 is more representative of a real market.
Brian Yu
Okay, so if you’re spending at the $40 rate then does that imply maybe at this rate in ’18 and ’19 we should see a growth in production out of the oil & gas?
Jim Flores
If we didn’t do any joint ventures that’s correct - you’d be growing at a $20 rate because you’d just be completing wells and putting them on instead of drilling any because you’ve drilled them in the first couple years. But our plan is to do the outside financing and take it from a $40 barrel rate, your number, down to $20 and grow the business with our partners say 75/25.
Brian Yu
Okay. And second was just on the outside financing. If I looked at what happened with Lucius, you sold 20% interest in the project but then the convertible preferreds were backed by the parent company. And if we take that same analogy in a way doesn’t that involve the mining assets again? Or is the plan to just limit any kind of outside financing purely to the energy assets and not involve FCX, the parent company and the mining side?
Jim Flores
Brian, I’m not sure that was guaranteed by the parent company. I think you’re reading through something there.
Kathleen Quirk
It’s at the subsidiary level, Brian, so there’s not a guarantee.
Brian Yu
Okay. Yeah, I thought the party that purchased it, they had some warrants to purchase PXP common stock.
Jim Flores
The warrants were for the subsidiary.
Brian Yu
Okay, got it.
Jim Flores
That’s why I said it’s 20% face but when you look at the full percentage of the subsidiary they got 25%. If I blended that I’m sorry but it’s all at the subsidiary level, so about 25%.
Brian Yu
Got it, thank you.
Operator
Your next question comes from the line of Oscar Cabrera with Bank of America. Please go ahead.
Oscar Cabrera
Thank you, Operator. Good morning everyone. I just want to get back to the question on the dividend. Is there in your lines of credit or debt any covenants that would limit you from paying the dividend if commodity prices stay low and we’re at the low end of your expectations in operating cash flow?
Kathleen Quirk
Oscar, this is Kathleen. There’s not a specific covenant on the dividend. We have maintenance covenants, financial covenants to maintain and that’s all going into our plan. Richard mentioned we are having some discussions about flexibility with the covenants as we bridge through ’15. But there’s not a specific covenant on the dividend.
Oscar Cabrera
Okay, great. And then the other thing is just getting back into this oil & gas CAPEX - so $1.7 billion in cutbacks or cut cap in 2016. Jim, can you just clarify: you’re expecting to get economics of sharing 25% of I’m assuming cash flow on these wells but you’re expecting to get 50% of the CAPEX. Can you just go over that again please?
Jim Flores
Let me tell you how it works because I couldn’t follow your math, Oscar. Basically the financing, we have $900 million of CAPEX ahead of us at our Holstein Deep and Heidelberg. We’re asking investors to put up 100%, put up $900 million and for that they’d get X amount of return on the capital they put up plus a residual interest, probably in the form of an override. And that would generate above market returns for their capital - somewhere on the low end 10% to 12%, on the high end 16% to 20% depending on what oil prices do.
And there’s a lot of capital out there that have contacted us who want to do those types of things. We’ll use that capital, and it’s selling a piece of the growth - it’s not selling our existing assets, our existing cash flow, those types of things, but it’s helping us accelerate the growth. Instead of just postponing spending and production performance we’re actually going to be able to in effect accelerate it with the third party capital. That will all be at the subsidiary level, and with the current structured form of equity at that level.
So there won’t be any debt to consolidate or anything to FCX, and it’s a great win-win for both parties. And they get the upside of the oil on the piece they get and we get the upside of the production on oil. And one thing in the oil & gas business, we’ve also affected our operating costs because if you’re not growing production your operating costs are going to stay high or increase. One thing about doing the joint venture, we’re able to have more production go through the same facilities and you’ll see our operating, our LOE costs go down, too.
So the purpose of lowering the CAPEX costs through the joint ventures and also increasing the production and accelerating the development will also lower our operating costs. So we’ll end up getting our operating costs down below $20 from where they are, or in the low-$20s from where they are in the high-$20s now; and then we also have our fixed G&A costs and so forth and then you have our capital costs.
So we’ve got our capital costs around, in the $20s; we’ve got our operating costs in the $20s. We’re in a $40, $45 cost environment or expanse environment in 2016 - that’s our goal on the oil & gas side. And we can live and prosper in a $60 world. It’s not as fun as $100 but it’s still… We’ve got to right size our costs and this is the most aggressive and best way to do it.
Kathleen Quirk
And Oscar, one of the things you can think of in terms of this funding is we did it on the mining side several years ago with the expansion at Grasberg where someone came in and funded the development. We added volumes and shared those volumes. So it’s not exactly but it’s just another analog that you can think about.
Jim Flores
Yeah, a lot of different structures, a lot of deals. But the key about having this is having quality projects with good economics where you can do it. That’s the big difference.
Oscar Cabrera
Fair enough - Grasberg 60/40 with [Real Pinto]. But what would be the attributable production then and the required CAPEX? You were looking at 80 million barrels so are we looking at 70 million now and an additional $1 billion in expenditures? What’s in mind?
Jim Flores
I’ll tell you what, Oscar - sign a CA and I’ll send you a teaser and show you exactly what it is. [laughter] We’re looking for investors. Seriously there’s a three-well development, a five-well development and a ten-well development depending on success but it’s somewhere between, call it net to FCX between 30 million and 70 million barrels depending on the success. I’m sorry - 30,000 to 70,000 barrels a day, not million barrels. 30,000 to 70,000 barrels a day of incremental production over the next three to four years. So they’re big, significant projects and that’s why we want to preserve them and develop them with outside capital for the benefit of FCX shareholders.
Oscar Cabrera
Right, thank you sir.
Operator
Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.
John Tumazos
Thank you. The debt target had been $12 billion net looking forward a couple years. Has that target changed? Should it be lower because you’ve divested some assets, impaired some assets, JV’d some assets and prices changed? Where do you think that target’s going to be for 2016-2018?
Richard Adkerson
Well John, I started out by saying that the change in copper and gold prices has really resulted in us having to shift a focus from reaching any sort of debt target, certainly in the 2016 timeframe, to adjusting our business to be responsive to much lower copper and oil prices. And that’s what we’re doing now. As we go through this process we’ll have a longer term goal of debt reduction and adjusting our balance sheet but we’re going to have to see how the world evolves to say how we’re going to respond to it. And it would just be impossible right now to set any sort of debt targets within timeframes.
We’ll be talking with all of you on a quarter-by-quarter basis and reporting to you how we’re responding to it. We’re not backing away from our debt reduction objectives and having a very strong balance sheet is what we’re going to do - it’s just the realities are we have to deal with the world that’s put before us and that’s the way we’re going to approach it.
John Tumazos
Thank you. It’s tough times and we appreciate all your efforts.
Richard Adkerson
Well, I appreciate that, John. As you know better than anybody we’ve been through these several times before and we were always aware that that’s a possibility, and we’ve been preparing ourselves for it and now it’s our job to execute.
John Tumazos
Thank you.
Operator
Your next question comes from the line of Nathan Littlewood with Credit Suisse. Please go ahead.
Nathan Littlewood
Good morning, guys, thanks for the opportunity. I had a few more questions on oil & gas as well. The first was just about the production and decline rates. You’ve given some really useful guidance of what’s required in this business to maintain outputs at that sort of mid-$50s sort of level. But under a [bare] scenario can you talk a little bit about what the un-remediated decline rates look like for each of these oil & gas assets?
Jim Flores
Well, just looking at an average, think about somewhere around 12%, 13% in our business. And remember with the timing of oil & gas coming on, spending, like we have some spending in our Vito project in our budget that doesn’t come on until 2020. It’s not a direct correlation to decline rates, the capital being spent. There’s some different variations. But if you think about a 12% decline rate in the business that’ll get you to kind of where you need to be on a maintenance capital which will be lower than what you’re seeing in our CAPEX.
Nathan Littlewood
Okay, and would the Gulf of Mexico number be a bit higher than that perhaps?
Jim Flores
Yeah, use 13% to 14% there and use 4% to 5% in California and that’ll get you kind of there.
Nathan Littlewood
Gotcha, okay. And just on this whole funding side of things, obviously at current oil prices the underlying assumption here is that the oil & gas business is willing to lever up, to spend the capital that you’ve got planned here. What I’m a little unclear on though is just how much further you’re willing to leverage this business up - I mean how much further the debt, how much more debt is appropriate here for this business to take on before a more drastic change to the production outlook might be required?
Jim Flores
When you’re saying “lever up,” Nathan, what are you talking about? Are you talking about CAPEX spend or are you talking about actually balance sheet debt?
Nathan Littlewood
Well the balance sheet debt. There’s no way that this business can generate anywhere near $2.3 billion in cash flow on $50 oil. So…
Kathleen Quirk
Right. What we’re working to do is to obtain third party funding for some of these capital expenditures - not in the form of debt but in the form of an equity participation by these investors in these projects. So it’s not levering up, it’s sharing the CAPEX with third parties and sharing the economics of the development activities.
Jim Flores
And trying to drive a net neutral goal. As I was trying to be clear it’s going to be difficult to do that in ’15 but we think we’ll be able to achieve it in ’16, just timing and capital inflows. So I guess the global answer to your question, Nathan, is that we don’t have much appetite all to leverage up. We’re going to do whatever we can to not do that.
Nathan Littlewood
Okay.
Richard Adkerson
I think this is an important point to make because we’re talking about joint venture participation - not debt obligations of the consolidated group. We’re obviously giving up some of the equity in these assets at the asset level, but in return because these projects have been put together value has already been created in them, you have people willing - and this kind of gets back to Oscar’s question - to pay more than their proportionate share of the forward costs because they’re compensating our company for all the good work that we’ve done in identifying the assets, developing them to date, presenting the opportunity.
Nathan Littlewood
Okay. So these equity and JV opportunities, this is sort of independent of the $900 million Holstein and Heidelberg that was mentioned earlier. Is that correct?
Jim Flores
No, that is how we generate the $900 million. That’s $900 million of CAPEX going forward in the Holstein and Heidelberg projects. We’re going to get the development JV to fund that $900 million which will reduce the $2.3 billion.
Nathan Littlewood
Okay. So you go from $2.3 billion to $1.4 billion. I guess what I’m getting at is at $50 oil there isn’t $1.4 billion of cash flow coming out of that business.
Jim Flores
Then we’re going to do the next one at Marlin and King and keep going. I was trying to make the point I’m not sure it’s all going to line up in the same year, and Richard talked about we’re looking at a two-year type of scenario to make sure that we get to a net neutral position and we [inaudible] what we take. Then on top of that these projects drive such good economics for Freeport, at any oil price they’re good business based on finding discoveries, delineating them and getting somebody to help develop them with us so we can drive higher returns for the shareholders.
So it’s kind of a continuation of the plan we were discussing. It takes on greater importance now as you highlight because the cash flows are not there to fund our projects right now, and so but it still drives better economics - even in a higher oil price environment.
Kathleen Quirk
And keep in mind for 2015 as you’re thinking about the numbers, we do have the puts in place that really give us a higher realization than $50 for 2015. So we’ve got that $20 of price protection; we’ve got to pay the put premiums of just under $7 a barrel. So our cash flows from oil & gas in 2015 will be higher than what you would expect in the $50 market.
Nathan Littlewood
Absolutely, that’s all very helpful. Thank you. So just one final question, and I guess a higher level one here: your approach or attitude towards diversification of the business is a little bit different to other diversified mining companies. I mean if I look at some of your peers they’ve all demonstrated a willingness in the past to sort of subsidize unprofitable businesses with profitable ones for a period - I guess Rio Tinto with its iron ore and aluminum businesses is a pretty obvious and recent example.
It sounds like your approach towards these two businesses is as it was in the beginning, which is they’re still sort of two separate buckets - you’ve got a mining or copper bucket and an oil & gas bucket, and the two are sort of not subsidizing one another. I’m just wondering if that is an approach that’s necessarily set in stone going forward? I guess what I’m thinking about is some of the costs of capital that you’re talking about here for external funding of the oil & gas business seem to me to be significantly higher than the cost of capital that the copper business has got access to at the moment. And the copper business is generating some cash so why would you not use some copper earnings to support oil & gas?
Richard Adkerson
Well, it comes back to the company’s overall financial situation. When we announced the acquisition of the oil & gas business, we talked about our entry into that business in two stages. The first stage was going to be one of de-lever - in other words, we incurred significant debt in acquiring the oil & gas assets. At that point we had a clear cut path because of commodity prices and paying that debt off in a reasonable amount of time. And then we said we were going to go forward beyond that point in investing where returns were greatest for our shareholders.
And I think that’s still the way that we would see it, is these significant recent declines in commodity prices are requiring us to take steps to protect our balance sheet currently. We want to work hard to protect our credit ratings - I think that’s important for credit investors as well as equity investors and it has other implications to our business. And so that means we’re going to be focused on looking at alternative sources of capital, and these joint ventures in the oil & gas business provide us a near term way of doing that.
It’s something our organization has been experienced in, the industry’s experienced in. There’s a huge amount of capital as Jim said available to do those sorts of things. So we are having a primary objective of protecting our balance sheet and our liquidity in the current environment. We don’t believe the current environment’s going to be the long term environment. We don’t have any predictions of when it will turn but we believe it’ll turn and then we’ll be in a position of allocating capital in a different way.
Jim Flores
Just from a standpoint of the oil & gas business, it has flexibility to fund itself, fund its projects. But really we’re all about driving higher returns for our shareholders, you know. And if we’re using outside capital on a promoted basis to develop these assets and we can manufacture these assets as we have in the past with great exploration results or exploitation results and we have this huge project in the Gulf of Mexico with tens of billions of dollars’ worth of development opportunities - maybe at some point in time it makes sense.
But right now it’s much better to accelerate the PV of that and the reserve life of our Gulf of Mexico business and we need to use outside funding to do it. And we drive higher returns for the FCX shareholders. So it’s a pretty get away from the cost of capital aspect. I mean if copper’s generating $5 billion of excess cash flow a year and so forth then you’d be having to measure oil & gas returns against other shareholder initiatives and so forth. But right now the best initiative for us is to run our business balance like Richard talked about and make sure that we take advantage of the market and the project financing; and accelerate our oil & gas business for the benefit of all the FCX shareholders.
Nathan Littlewood
Okay, thanks very much guys. I appreciate your time.
Richard Adkerson
And Nathan, I’ll just say one thing that 2008 has taught us and one thing this current environment’s taught us, if you’re in these commodity businesses diversification within commodities is not going to pull you out when these broader scale things happen to you. So we are focused on what are the best assets, what are the best returns for our shareholders; how do we manage our balance sheet to allow us to take advantage of this great asset base. And that’s what we’re focused on.
Nathan Littlewood
Absolutely.
Jim Bob Moffett
This is Jim Bob. I want to make a couple general comments. Earlier someone mentioned the Rio Tinto financing [inaudible]. The reason the financing was so optimistic for us was that there was no production that was taken from the existing reserves. Rio Tinto only participated 60/40 in the new reserve. With [inaudible], and if you look at Slide 38 with the platforms we have in the deepwater we acquired from BP - BP spent years trying to put those platforms in the right place, that’s why there’s so much oil & gas there.
What’s easy to understand is the existing wells that we have and existing reserves wouldn’t be earned by the investor that comes in. It’ll only be participation in the additional wells we drill, so that’s exactly like the Grasberg deal that we structured. The reason why the Grasberg deal could be sold on such a promoted basis is because of the great asset that was found out there. For the same reason what you’re seeing with these big [platforms] is they’re [inaudible] throughout the deepwater trench, and I want to emphasize again that all the studies and geological work that went into putting those platforms in the right place. They just didn’t throw darts at the wall.
Secondly we’ve finally got a discovery that we’ve been looking for on [inaudible]. It was a well that was tested in the Tuscaloosa is the second largest well that we’ve ever tested onshore. That rock, which is [100 million a day rate] may be the biggest well for that. But through the deep [sub-soft] structure we finally found a formation that had the right return to give us the entire flow rate. And we control that whole [play] onshore. Dozens of prospects have the same Tuscaloosa formation as their primary target. [Inaudible] is the Tuscaloosa trench to the north and Mobile Bay over to the east, which is a major asset if you get a chance to look at it.
So we control some huge amounts of reserves that’ll be drilled in the future. So this is not an ordinary portfolio, just like Grasberg wasn’t ordinary. When I first started working on the financing at Grasberg a lot of people in the mining business said “You can’t promote a mining asset the way you do oil & gas, Jim Bob.” Well, if you’ve got the right asset you can.
We have the right assets and we’ve just got to give them a little time to do what’s necessary - finance them and add the maximum value.
Nathan Littlewood
Thanks again, I appreciate all the color. Thanks, guys.
Operator
Your next question comes from the line of Steve Bristo with RBC Capital Markets. Please go ahead.
Steve Bristo
Yeah, thanks for taking my question. I just wanted to come back to this $900 million in project financing. You mentioned that if you do that $900 million that’s turning the growth back on. So if you do actually get the $900 million how much does that actually impact the $2.3 billion you’re currently forecasting that doesn’t really have the growth built into it?
Jim Flores
Yeah, you bring up a good point, Steve. It adds a couple hundred million of growth capital back into the $2.3 billion, so it’s probably a net $600 million or $700 million of net reduction in CAPEX because we add $200 million or $300 million back of growth spending that we have to do to execute on that plan.
Steve Bristo
Can you just walk me through again how you went from that $40 per BOE down to $20 for your share of capital spending?
Jim Flores
Well, it’s directionally from the standpoint you have to add additional joint ventures - you can’t just do it with $900 million. You’ve got to continue to do the Marlin King joint venture and then the subsequent joint ventures after that - all in development as we go forward. So basically you take a half to 60% of our CAPEX spending and do it in third-party development, third-party joint ventures for development and you can get to that number. But it’s going to take some more inputs that I’ll have to go through with you at a later date - I can’t go through them all right now.
Steve Bristo
Oh, so the $20 was a target then, okay.
Jim Flores
Yeah, it’s a target because if we get our costs down to $25 and our CAPEX costs, our CAPEX investments down to $20 that’s $45 out of a $50 environment. That’s what it is. So you kind of back into the target and then you have to do what you have to do to get there.
Steve Bristo
And would the $900 million be fully just in 2015 or is there any of that that really impacts 2016?
Jim Flores
That’s in 2015, so it’ll be a net $600 million, $700 million in 2015. Think about it that way.
Steve Bristo
Okay, thank you.
Operator
Your next question comes from the line of Jeremy Sussman with Clarkson. Please go ahead.
Jeremy Sussman
Yeah, hello, good morning. Obviously there’s been a lot of discussions about JVs and farming out some of the oil & gas reserves. Can you give us a sense, I think you talked about sort of over a two-year timeframe but it sounds like you’ve had some discussions. I guess when can we maybe expect an update from you guys in terms of obviously the ability to update our numbers in terms of production, etc.?
Jim Flores
Sometime this summer. We’ll be updating as we go.
Richard Adkerson
And we’ll give you a status report at our next quarterly call. We’re coming up on the time of year of metals and mining conferences, so as always we’re going to be transparent and give our investors the current status of things.
Jeremy Sussman
Okay, great. But it sounds like we should have some clarity by the summer on some of this.
Jim Flores
Well, you hope to. It all depends a lot on commodity prices. If commodity prices stay low than you’ll probably have it sooner rather than later because investors will be a little more hungry. Where it’s diverted is they get a little less hungry as oil prices recover, so…
Richard Adkerson
And as Jim talked about this is not like it’s going to be one fell swoop deal. I mean we’re going to make steps; it’s going to be an ongoing process. So it’s just these things happen very quickly as I keep saying over and over, and we’re responding to it and we’ve started this process of talking to potential third-party investors. And we’re going to advance that as quickly as we’re able to.
Jim Flores
And Jeremy, the big deal is it’s maximizing the returns to the FCX stakeholders. That’s the key objective here. And sure, it offsets CAPEX in a low-price environment and everything else, so…
Jim Bob Moffett
This is Jim Bob. I want to be sure to remind everybody that these joint ventures we’re talking about on the platforms that we have, the existing platforms, they will not participate in current production, current reserves. All the additional reserves, the new reserves that were found by the subsequent wells - identically to what we referred to with the Grasberg financing. None of the initial production was included in the Rio Tinto bid; it all would depend upon speculation for finding new reserves that they participate 60/40 in - importing at 60.
So remember, we’ve got a lot of investments we’ve put in these major hubs out there. Nobody else has these hubs and for that reason any production that’s found near the hub, they’ve been drilling around on a [inaudible] basis. And we will bring production to you. All these platforms are under capacity, so you have the ability to sell a development well off a promoted basin. And we also have the advent of people drilling discoveries out there that they know they can’t build. They put their own freestanding platform and they’ll be bringing the reserves to you.
Jim Flores
Right, and that’s articulated on Page 41 of the slide presentation where it talks about our reserves and excludes Highlander and Holstein Deep. And the Holstein Deep reserves and growth are what we’re talking about doing in the joint venture. That’ll give you a representation when we talk about net amounts that aren’t in the joint ventures.
Jeremy Sussman
That’s great, thank you. Thank you very much for all the color.
Operator
Our final question will come from the line of Garrett Nelson with BB&T Capital Markets. Please go ahead.
Garrett Nelson
Hi, good morning. Could you remind us what the annual maintenance CAPEX is for the mining business? On the CAPEX guidance slide, is that $1.2 billion number for other mining CAPEX in 2015 a good number to use, or perhaps that $1.2 billion is not entirely maintenance CAPEX?
Kathleen Quirk
That’s a good number to use. It’s in the range of $1.0 billion to $1.5 billion but the $1.2 billion that we’ve got in ’15 is a good kind of run rate to use. We’ve taken steps to defer things when we can but on an ongoing basis it’s in that range.
Garrett Nelson
Okay. And then again on that slide the $2.5 billion of major CAPEX on the mining side for 2015, you footnote that that primarily includes Cerro Verde and Grasberg underground development. Cerro Verde will obviously drop off after this year, but if you would how much CAPEX specifically is budgeted here both for Grasberg underground development and for Cerro Verde in each year 2015, 2016, 2017?
Kathleen Quirk
The Cerro Verde CAPEX is split between ’15 and ’16. We had $3.1 billion incurred through ’14 and most of that difference will be spent in 2015 with some trailing into 2016. We also have the Grasberg underground which as Richard said will average $700 million a year and that’s to our interest. We do have a couple years where it is higher than the $700 million average and some that are lower than the $700 million average, but that’s about what we’re spending on average for the Grasberg underground.
We’ve also got some other projects in 2016. We’ve got, in 2017 we’re expanding the Miami smelter and then as you get into ’17 we start the development of the extension of the Safford mine. So we’ve got some CAPEX in 2017 for the Safford extension as well as the Miami smelter. But the bulk of the Cerro Verde spending is completed in ’15.
Richard Adkerson
By far the bulk - I think it’s roughly $500 million left in 2016. But I do want to point out that this is a project that’s scheduled to finish right at the end of the year, so it’s a big construction project. As I said we’ve got 12,000 to 14,000 people there and we’ll update you as we go through the year. There’s a possibility that some of these costs may go over into the next year, but right now things are looking very good.
Garrett Nelson
Okay, thanks a lot, Richard and Kathleen.
Operator
I will now turn the call over to management for any closing remarks.
Richard Adkerson
Well, we’ve given you a lot of information today. Someone mentioned it’s a complicated world - indeed it is. We’re going to respond to it as we have historically in a prudent and thoughtful way and we appreciate all of your interest in the company. We’re available to respond to follow-up questions that you may have, and just let David know and we’ll answer your questions as we go forward. Good luck in the Northeast and we look forward to talking with you again.
Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation and you may now disconnect.
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