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

Q4 2007 Earnings Call

January 23, 2008 10:00 am ET

Executives

Kathleen Quirk - Executive Vice President, Chief Financial Officer and Treasurer

Richard Adkerson - Chief Executive Officer

Jim Bob Moffett - Chairman

David Thornton - President, Climax

Analysts

John Hill - City Investment Research

Brian Macarthur - UBS

Victor Flores - HSBC

John Tumazos - John Tumazos Investment Research

Lawrence Jollen - Lehman Brothers

Justine Fisher - Goldman Sachs

Brett Levy - Jefferies & Company

Charles Bradford - Bradford Research

Ken Silver - World Bank of Scotland

Sunil Dattadhar - Centennial Asset Management

Operator

Ladies and gentlemen, thank you very much for standing by. And welcome to the Freeport-McMoRan Copper & Gold Fourth Quarter 2007 Earnings Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

I now have the pleasure of turning the conference over to Kathleen Quirk, Executive Vice President, Chief Financial Officer and Treasurer at Freeport-McMoRan Copper & Gold. Please go ahead, ma'am.

Kathleen Quirk - Executive Vice President, Chief Financial Officer and Treasurer

Thank you and good morning, everyone. And welcome to the Freeport-McMoRan Copper & Gold fourth quarter 2007 earnings conference call. Our earnings announcement was released earlier this morning and a copy of the press release is available on our web site at fcx.com.

Our conference call today is being broadcast live on the Internet, and we have several slides as usual to supplement our comments this morning. We will be referring to the slides during the call and they are accessible using the webcast link on our fcx.com website homepage. In addition, to analysts and investors, the financial press has also been invited to listen to today's call and a replay of the call will be available by accessing the webcast link on our Internet homepage later today.

Before we begin today's comments, I would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. We would like to refer all participants to the cautionary language included in our press release and slide presentation and to the risk factors described in our SEC filings.

Also on the call today are, Jim Bob Moffett, Chairman of the Board; Richard Adkerson, Chief Executive Officer; Tim Snider, Chief Operating Officer. We also have several members of our senior operations team with us today, who Richard will introduce in his comments.

And it's our -- all of our great pleasure to be here today to talk about our spectacular year that we had in 2007 and to our outlook. I'll start by briefly summarizing our financial results and then turn the call over to Richard who'll discuss our operations and outlook. We'll then open the call for questions.

Today, FCX reported fourth quarter 2007 income from continuing operations applicable to common stock of $423 million, $1.07per share compared with $426 million, $1.99 per share for the fourth quarter of 2006.

For the year ended December 31, 2007, we reported income from continuing operations applicable to common stock of $2.7 billion, $7.41 per share compared with $1.4 billion or $6.63 per share for 2006.

Our 2007 financial and operating results include the wholly-owned subsidiary, Phelps Dodge's results following our acquisition on March 19, 2007.

Net income in the fourth quarter from continuing operations included net charges totaling $0.29 per share, $120 million, which included $143 million or $0.35 per share for the effects of purchase accounting and a gain of $23 million or $0.06 a share to mark-to-market, the copper price protection program. These contracts were financially settled in January, 2008 for approximately $600 million, which concluded this program.

Our fourth quarter result also included a reduction to revenues of $281 million, this was a $137 million to net income or $0.33 per share for prior period adjustments to concentrate sales.

Our sales during the quarter from our mines totaled 878 million pounds of copper, 161,000 ounces of gold and 19 million pounds of molybdenum. We exceeded our previous estimates of 875 million pounds of copper, 100,000 ounces of gold and 18 million pounds of molybdenum.

Pro forma sales for 2007 including the pre-acquisition sales from Phelps Dodge totaled 3.9 billion pounds of copper, 2.4 million ounces of gold and 69 million pounds of molybdenum.

Our recorded realized prices for copper before hedge adjustments average $3.12 per pound in the fourth quarter, that was 4% higher than the year ago quarter. Our recorded realizations were less than the market average price of $3.28 because they were heavily weighted to the forward copper prices of $3.02 per pound at the end of the quarter.

Our operating cash flows during the fourth quarter totaled $1.3 billion and over $6.2 billion for the full year. Capital expenditures during the quarter were just over $600 million and $1.8 billion for the full year.

In October we completed the sale of our international wire and cable business, Phelps Dodge International Corporation for $735 million. PDIC's operating results are reflected as discontinued operations in our consolidated statements of income in our assets and PDIC's assets and liabilities have been reported as held for sale in FCX's balance sheet.

We fully repaid the remaining $1.55 billion in term debt at the end of 2007 brining our total debt repayments since the March 2007 acquisition to over $10 billion. At year end our total debt approximated $7.2 billion and consolidated cash was $1.6 billion compared with total debt of $8.7 billion and cash of $2.4 billion at September 30th, 2007.

We've also included up in our press release, our preliminary estimate of consolidated reserves, recoverable reserves of copper totaled 93.2 billion pounds, gold was 41 million ounces and molybdenum was 2 billion pounds at the end of 2007.

Now, I'd like to turn the call over to Richard, who will be reviewing our operations and outlook and will be referring to the materials included on our website.

Richard Adkerson - Chief Executive Officer

Good morning everyone, I want to really focus our call today on our outlook comment on our fourth quarter results but I think it is certainly worth noting just what a great year it was for FCX during 2007.

We transformed the company from a company that has a single grade asset in the Grasberg mine in Indonesia, it's now the leading publicly owned copper producer in the world and we are very pleased about where the company is situated about the longer term markets that we are involved in and about our growth prospects.

We've made great progress during the year and successfully integrating Phelps Dodge and FCX into a single company where now we have a single operating team, a single financial administrative team and that process is going very well indeed. I have here with me today Tim Snider, who served as our President and Chief Operating Officer during 2007. Tim has had a very long and successful career in this industry and with Phelps Dodge and has been key in helping us successfully integrate the company. He is retiring April 1, and will -- but will continue to work with us on a consulting basis and we value his participation.

We have a senior management group now, the operating group who will serve the chief operating functions. [Brad Congress] here today, who will be leading our -- who is leading now our operations in North and South America. John Marsden is reporting from McMoRan mining company, which deals with technology and exploration and construction and support functions for all of our businesses globally. Dave Thornton, heads our Climax Molybdenum business with excitement in that business including the restart of our Climax mine.

Mark Johnson is here who is our Chief Operating Officer in Indonesia and has -- had a long career with Freeport. We have one other executive, Phil Brumit, who we recently hired, had a long career with Newmont, running there, at one point of his career, running the Batu Hijau mine in Indonesia. He is now located in the Democratic Republic of Congo and leading our Tenke Fungurume Group. So that will be our operating management going forward.

A couple of other broad comments. Kathleen mentioned the progress that we made in reducing our debt and repaying this $10 billion of term debt in roughly nine months from the completion of the transaction is a major step for us when this time last year, we were targeting doing that within a three or four year period. Now, we have that behind us and that allows us to be very aggressive now as we approach our business going forward.

We are in an industry where it's very difficult for companies to meet production goals and to add new production. We have a company where our production is growing. It grew this year and I will be talking about the growth that we have in front of us from projects that we've already identified and we have a great set of properties and resources that we're now analyzing and considering how to develop those to add production beyond our current plans.

We are generating substantial cash as our financial statements show. Our Directors increased our common dividend by 40% during the fourth quarter of '07. We now have an authorized 20 million share open markets purchase program for our common shares and particularly beginning in the second half of 2008, we are going to be generating excess cash flows.

Slide 4, you can see a series of charge that just illustrate the change in our business. Revenues grew from under $6 billion to roughly $17 billion in '07. Net income from $1.4 billion roughly doubled. Our cash flow went from less than $2 billion to over $6 billion as cash flow from operations after taxes and interest. And the enterprise value from year-end 2006 to 2007 grew by four times. So, our company is a changed company, a strong company financially and one with good opportunities.

Page 5 shows the nature of our business now, where previously Freeport was a copper and gold company, which still have the largest gold mine in the world, but on a percentage basis, it presents roughly 10% of our pro forma revenues. Molybdenum, which is a very -- which we are the leading producer in the world. We have great assets, great growth opportunities, is a positive contributor to our business. 78% of our revenues come from copper. Two-thirds of that comes from copper concentrate and one-third from SX/EW operations which Phelps Dodge over the years has been a technological leader in developing that process which allows us to profitably mine lower grade deposits.

Lot of our growth in the future is going to be sulfide ore bodies, we've been the leaders in the development of technology for processing those ores and that's going to be key to us as we go forward.

Page 5 has the operating data comparing '07 with pro forma, that's combined Phelps Dodge and FCX for the fourth quarter of '06. As we had indicated our volumes were lower in the fourth quarter than they have been or if they will be on average going forward and all you have to do is go down to that chart at the bottom, right side of page 6 and see the significant drop in volumes from Grasberg during the fourth quarter.

We had over 400 million pounds of copper in the fourth quarter of '06, 183 this year over 500,000 ounces and 124,000 ounces more than projected, but that simply reflects the sequencing timing issues and for those of you who have followed Grasberg over the year's, you understand this that it's certain times we've to mine the upper reaches of the mine in order to get to the very high grades at the center of the mine and that's what affected our volumes for the fourth quarter.

We actually on a consolidated basis met our projected targets for our volumes during the fourth quarter and we consider the fourth quarter operationally to been a very strong quarter. You can see that our volumes are roughly split between North America, South America and Indonesia are reflecting our operations and that we had good performance out of our molybdenum business during the year.

Our earnings came in this year for the fourth quarter below analyst consensus and there was one reason for that and that has to do with the fact that two-thirds of our copper sales are sold under industry standard contracts which provide that shipments our price provisionally at the time they are shipped and openly sold over a one to three months period following shipment.

What this means for us is that about half of our sales in any quarter are going to be priced at the price at the end of the quarter and not at the average price during the quarter. The actual cash that we all realized will be roughly overtime at the average price before accounting purposes at the end of the quarter. We accrue sales and perhaps those sales it comes at the end of the price at the end of the quarter.

Fourth quarter '07 was a quarter in which the spot price of copper began the quarter at 370 and ended the quarter at 301. That met during the fourth quarter there was a downward adjustments for the accrued sales we had going into the quarter and half of our sales recorded $3 roughly a pound which was less than the average pounds for the quarter.

We have the details for that here, but here we had a quarter in which we made our production guidance our cost re-inline expectations and the financial results simply reflect the pricing of the marketplace.

Prices have risen during January and as those provisionally price contracts are settled, they all have the benefit of the prices whenever they are settled and during the first half of January they were higher than they were at the end of [December]. So, I just wanted to make that point for that.

On page 8, we again show our annual sales, you can see how the sales were divided between our North American mines, South American mines and Grasberg and our annual unit cost. Unit cost reflect volumes and because of the lower volumes in Grasberg this year, its cost reflect that. Throughout the industry, everyone is being infected by input cost and we are as well. Diesel cost, coal cost, labor cost all are reflected in this number. For the year, our consolidated net cash cost, net of by-product credits, the gold and molybdenum credits were $0.75 per pound, which is certainly an attractive cost number for an industry of -- where the average selling price was well over $3 a pound.

Our reserves are presented on page 9. This year, we have priced reserves using a copper price of $1.20 last year, Phelps Dodge used $1.05 and Grasberg used $1. In addition to the increasing prices, the reserve calculations which are an economic determination as well as a physical determination, reflect the higher cost of input. So, there's higher commodity prices, higher input cost. As a result of our drilling activity and price changes, our reserves of copper were essentially the same at the end of the year as at the beginning of year. Additions and revisions essentially offset production, 90% of production at least.

Molybdenum reserves where slightly higher and gold reserves went from 42.5 million and 41 million ounces. Interesting at the bottom to see what our reserves are doing over a longer periods of time and you can see the company has done a great job. The companies have done a great job in maintaining the reserve position. Our reserves are split between North America, South America and Indonesia as indicated on the chart on the right side of the page.

Markets, there's lots of questions about markets today, because of the turmoil in the financial industry and what impact that might be having on their overall U.S. economy. With our business today, we are continuing to see tightness in the copper marketplace. The U.S., beginning at the end of 2006, saw the impacts on copper consumption or the slowdown of the residential marketplace and the slowdown in the U.S. automobile industry.

Today, the copper demand in the U.S. from non-residential construction and other usage continues to be relatively strong. It will certainly be affected about the course of the questions there.

Globally, China continues to lead in the world's copper demand and growth was extraordinary during the years in China. Global inventories remained very low. They are lower today than they were a year ago and the copper price is stronger today that it was a year ago. And so, we are approaching the world with a very positive long-term view about our commodities. We believe that we can focus on developing suppliers, maintaining production of our existing mines and be in a position to benefit from these positive markets for our shareholder as we go forward.

Turning to page 11, for 2008, we are looking to produce 4.3 billion pounds of copper and 1.3 million ounces of gold and 75 million pounds of molybdenum, using $3 copper, $800 gold and $30 spot price for molybdenum, that would indicate operating cash flows for our business of $5 billion.

Our cash flows for 2008, operating cash flows will be affected by significant working capital uses during the first half of the year. We've paid the final payment on the historical Phelps Dodge copper price protection program when we had to write a check for $600 million in January. That reflected in this number, there is also a significant cash taxes that we're paying.

But by the second half of the year, we'll be generating various substantial cash flows, three quarters of our cash flows will come in the second half of the year. On this model basis, we've capital expenditures which reflect all of our expansion projects that I'll be talking about estimated at $2.4 billion for 2008.

The debt reduction is illustrated on page 12. At the time of the acquisition we had $17.6 billion of debt, $10 billion of term loans, $6 billion of senior notes as well as the remainder being existing debt from the companies.

We've now paid off $10 billion of that and really have remaining only the $6 billion of notes and other long-term debt for the company. We're at the capital structure that we were targeting due to transaction. Now our cash flows are going to be focused on investment activities and to the extent that we have excess cash flows, we'll be in a position of following our historical practice, returning those to shareholders. We're really excited about our development opportunities for this company.

On page 13, we begin a discussion of those, the Safford mine and Safford Arizona, first new mine developed in the United States in many years, 12 years and we are about to start to work to get the rights to develop this mine construction and is complete in all material respects. We started up the processing facility in the fourth quarter producing copper in December.

This project is designed capacity of 240 million pounds of year and it's a very efficient operation will be a good contributor to our company. We are starting a historical mine in the historical mining district with Miami mine. We expect to produce 100 million pounds of copper a year about 2010. Operation will facilitate the ongoing reclamation activities that we've had in this area from historical operations as well as contributing cash to our company from the investment that we are doing.

At Morenci, the flagship mine of U.S. copper business for 100 years. We have restarted an historical mill added a new processing facility using new technology developed by Phelps Dodge to leach concentrate from this mill facility.

The mill has a design capacity of 54,000 tons per day and we are approaching that. We continue to ramp up the leach plant. This project will add 150 million pounds of copper annually and help our cost profile there and give us great experience to conduce as we go forward with other expansion opportunities.

I mentioned when I introduced Dave Thornton who restarted the Climax. Molybdenum mine this is again a historical mine which is again one of the great mines in the history of the U.S. mining industry has an operated in a number of years after completing a feasibility study we are now embarking on a restart of this operation. It's not developing a brand new mine, but we've been processing the water that's coming out of the historical mining facility. $500 million project, its an open pit, operation was very attractive, cash cost for a commodity which is currently selling for over $30 a pound with cash cost of $3.50 a pound.

The initial project is designed with a new mill that we're constructing to produce 30 million pounds of molybdenum a year. The resource is there to double that and we’re going to be monitoring the marketplace and are reaching decisions on further expansions of that operations as we go forward. But this is the largest highest grade undeveloped moly resource in the world and its going to be a great asset to go along with our industry mine and by-product moly production to -- it allows to continue to be the leader in that marketplace.

The Cerro Verde mine in Peru, $900 million project completed just over a year ago. Second half of the year, it was operating at capacity, tripled its production level to over 400 million pounds a year. It has moly component that we will be bringing to the marketplace during 2008, continuing to do exploration drilling there and looking for further opportunities to expand this great ore body.

In Chile, the El Abra mine, which has been a very positive producer from the oxide ore body that’s there has a significant sulfide ore body that we are now looking to develop, which would extend the life significantly.

We are working with the government on the environmental impact of this project. Again, it's not a new mine but an alteration and expansion of an existing mine that will be -- that we will look forward and moving forward with our partner Codelco at that mine.

In Indonesia, we are continuing with our work underground. Today, the DOZ mine which is the current producing underground mine. We have now been block caving underground at the Grasberg, in the Grasberg area for 20 years now very successfully. The DOZ mine went from 25,000 tons a day to 35,000 tons a day, nameplate, completed a 50,000 ton expansion mid last year. It's actually operated that over nameplate at 59,000 tons per day in the fourth quarter, hit 80,000 tons per day on at least one day and now we are going to be looking to expand it to 80,000 tons per day on a consistent basis. That makes this a very, very large block cave mine by any standards around the globe.

Great indicator of the future of the Grasberg district, when the Grasberg -- following the depletion of the Grasberg pit in roughly 2015, to be prepared to deal with the transition underground, we've been developing this common infrastructure project which is getting very near completion to drive a new added at 400 meters below our existing added to get to the underground reserves below the Grasberg and we will be beginning development activities for the Grasberg block cave in the first half of '08.

We are also developing a smaller [scoping] mine to Big Gossan, which will be in production by 2010. At the same time, we are enhancing our mill using high pressure grinding roll facilities to with our older mill line to improve productivity and taking further steps to improve this mill facility, which is the industry's largest mill facility globally.

And then we, on the other side of the world, in the middle of Africa, we are really excited about what we have to work with the Tenke Fungurume concession in the Democratic Republic of Congo. This is a very large concession, 600 square miles. It's a project that where we're continuing to do exploration drilling and analysis of the ore body which has very high grades of copper and cobalt near surface and while we're engaged in a initial project which is a good project. $900 million project.

We're targeting bringing it online initially during 2009 to produce 250 million pounds of copper and 18 million pounds of cobalt annually. The real focus here is where we go beyond this initial project. How aggressively can we define the ore body, develop the logistic systems, put the resources in, work with the government on all the issues that involve doing business where we are physically located, but this is an ore body that has a chance of joining the Grasberg as the one of the world's great ore bodies and that's what we are committed to pursuing and doing so aggressively.

I mentioned that we have hired a new President Phil Brumit. We have also brought, bringing over a number of people who have experienced in the expansion that we did at the Grasberg during the 1990s. We're going to leverage off that experience on how to deal with the community issues, the employee issues as well as the production and logistic issues of developing this great ore body and it is something that we're tremendously excited about.

Immediately after we completed the merger we began an ore body by ore body review of each of the producing in historical ore bodies in the Phelps Dodge portfolio of assets and we are continuing with that project. We are looking to first see what kind of information we had to understand the geology of this ore bodies and in the number of cases we are significantly expanding our core drilling to understand those ore bodies and further expansion opportunities may be available to us. What kind of additions to reserves can we do, how can we, and translate reserves into cash flow producing assets.

Today, we are announcing a first step in that process. We are looking at incremental expansions beyond those previously announced at Morenci, Sierrita, Bagdad and Cerro Verde. These are relatively small projects but in total they will involve capital of 400 million, incremental annual metals that will -- when they reach full operations of over 200 million pounds of copper and 7 million pounds of moly very attractive rates returns on this project.

So, we are going, we are already -- these are approved by our board, we are spending money on it and we are going forward with these projects. And then at the same time John and his team working with our operating groups are now looking to see what potential, larger scale of expansion projects might be available to us as we look at all the issues that go into expansions, the economics, the geologies, the technology, the end rights of water usage all of those types of issues will break there.

Page 19, illustrates what opportunities we might have available. I mentioned earlier we have over 90 billion pounds of recoverable copper reserves at a $1.20. We will be reporting in our 10-K a resource at a $1.50 of mineralized material that has contained copper of a 100 billion pounds and that's what gives us these opportunities to look for further expansions of our reserve and our production facility.

We're continuing to explore. We're substantially increasing our exploration budge. This year we spent just under a $120 million, and next year we plan to spend a $175 million. This is principally drilling activity. In North America, we're going to focusing on Morenci as well as the Lone Star deposit, which is a very large indicated ore body adjacent to the Safford mine, which we’re doing, drilling on now. And in South America Cerro Verde and other places. In Africa the Tenke Fungurume, we have a greenfield project nearby and a prospect we are calling Kisanfu and continuing our exploration in Indonesia in areas adjacent to and depth of the Grasberg and then outside of the Grasberg producing area.

Exploration really is what ultimately distinguishes a natural resource company. Its what built our company and its what we’re going to use to build our company going forward in the future. Tenke Fungurume is a tremendous exploration prospect. We've identified a project, we’re looking for further projects to go forward there as I mentioned. In Indonesia we have the rights to over 2 million acres at outside of the Block A of the PT-FI COW where the Grasberg is located. Grasberg is the only mine on the western half of Papua, same geological features that created the Grasberg where it play throughout the mountains and go through there and we are continuing to explore there. We also have other greenfield projects around the world that we're looking at.

Page 22, just give some details of the diamond drilling we’re doing with 10 drill rig at Tenke Fungurume where we are going to be very aggressive in pursuing this and understanding what the geology gives us and what the projects will be going forward.

Page 23 is a chart, I think that's indicative of what we are about as a company and why we wanted to combine these companies and go forward. We are looking at increasing copper production from 2006, 3.60 billion pro forma, 3.9 last year, 4.3, 4.5, 4.8, that's not something you see typically in this industry. These are projects that are approved. We are spending capital on and beyond that we are looking for other ways to expand longer term to enhance our operations.

Looking forward into 2008 itself, I mentioned how our volumes, we backend loaded this year. You can see that on page 24 where we will have a first quarter from a buying standpoint that will be very similar to the fourth quarter of '07. Then increasing in the second quarter with really strong operations in the third and fourth quarters. Fourth quarter should see us at over 1.2 billion pounds of copper, 600,000 ounces of gold and this will be somewhere what we've urged in the first half of 2007 with the Grasberg operations.

Page 25 shows the vision of our volumes by region. It also shows our net unit cost and unit cost again reflect obviously the lower volumes that we have and we have copper and the increase in the unit cost inputs as we go forward. It also shows the by-product credits from Molybdenum in gold. Unit costs on this basis are projected to be at $0.96 a pound.

From a cash flow standpoint, we continue to have the opportunity to generate very strong amounts of cash flow.

Page 26 shows that in $3 copper as we go forward, the annual average operating cash flows for 2008, 2009 would be $6 billion, you can see the variations with different prices and on the following page we have for your use, a sensitivity to commodity prices or changes in those unites and you can see we are very highly leveraged to copper.

Capital expenditures, as I mentioned for 2008, on slide 28, are projected at $2.4 billion and as the events begin completing our projects our current budgets provide for significant reductions in 2009 and 2010 in capital expenditures. And what we hope is that we can find new projects, new opportunities to spend capital loan possibly as we go forward and that's what we are working to do.

Page 29, then comes back to just how strong our cash flows are. If we look at our cash flows that would be operating cash flows reduced by our known capital expenditures and a look at the cash required for our annual dividend now with $0.75 a share in our preferred dividends. You can see a $3 copper will be generating excess cash flows on annual basis, of an excess of $2 billion a year and that is really a significant amount of excess cash.

Financial policy has been clear cut and one that we're maintaining, we're going to have a strong financial position, we believe we are optimistic about our markets going forward. Year ago, you had said that copper was over $3 a pound now you would yourself, we have been very happy about it and yet we are $3 a pound and still worldwide inventories are low.

The outlook for the metal long-term is very positive considering the dynamics of how copper is used around the world. And a particularly, the challenge is the industry is having a producing copper. So, we are optimistic about future copper markets and strong markets would allow us to have ample of cash to invest in new projects to continue to look for opportunities on an economic basis to reduce debt.

We really don't have maturities to deal with and then we provide cash for our shareholders and we are committed to our long standard tradition of maximizing value for shareholders. I mentioned the increase of the dividend, the share purchase program and we'll be reviewing market conditions, the performance of our company and the cash availability on how to execute this financial policy as we go forward.

With that, we'd like to open the lines for questions and we look forward to respond it to your questions.

Question-and-Answer Session

Operator

Absolutely, sir. (Operator Instructions) Our first question comes from the line of John Hill of City Investment Research. Please go ahead, sir, your line is open.

John Hill

Great. Thanks and good morning everyone and thanks for a detailed presentation as always. Since it's, I guess, Tim's last go around on an earnings call and we will certainly miss him and his steady hand at the tiller with the operations. Can we talk a little bit about an aggressive approach to projects in the Southwest US, Sierrita, Bagdad, Miami you had a conservative approach to reserves at $1.20. Can we, read there some sensitivities in slides, can we talk about, how new or old, these expansion projects are? And then what the sources of sensitive in reserves are and where we should look for the biggest upside?

Richard Adkerson

Let's see, the approach that we have taken John, and thank for your comments. Is illustrated by the fact that we begun this project of reviewing opportunities and we are taking it in steps. We are looking at undertaking the projects that I mentioned, which will first of all be good rates of return projects in and out themselves for the capital that we are committing, and they would be good projects at much lower copper prices than we have today. But at the same time, they are also setting us up to be in a position to more aggressively pursue the bigger projects that are available to us. And a number of these projects are sensitive to prices. You could just see that in the resource number that we gave to you and as we go forward, we're going to be seeing how we can approach it, based on the market conditions as they progress, [they can still in the] progress we make with these initial steps.

We are looking at technology to see how they can help us achieve this, the work that we've done with high prices grinding rolls, it is a big forward step in energy efficiency for milling operations. So, the work that we're doing with the concentrate-leach has potential application to the number of these projects. We continue to do work with process technology and with mine technology to be more efficient all of which, in addition to positive prices, allows us to go forward with it.

The great thing is we have the resources that are available to us. It’s a not a question of having to go out and do exploration and while we do have issues related to some land rights issues and water issues and permitting issues. Those issues aren't nearly as challenging as they are when you are starting up a brand new mine in a new area of operations.

So, we believe this is a great opportunity for us to take steps towards getting higher volumes and then be in a position to move on larger projects and we'll be reporting our analysis to you on an ongoing basis every quarter, you will understand exactly where we stand with these process.

John Hill

Great answer. And then just on that subject, on Climax, anything new in terms of the approval process and how confident are we that we can adhere to the timetables than lay down?

Richard Adkerson

John, hang on one second, I think Jim Bob had an addition to your earlier question.

Jim Bob Moffett

John I just wanted to -- it's Jim Bob Moffett. I just wanted to add to Richard's comment and emphasize what you said about the fact that this is not like exploration, because in the case of all the ore bodies that we have discussed, we've got drill holes that have defined, mineralized material and what we are doing with our program, 75% of our exploration budget is actually on [exportation], there is a sheet of ore underneath all of our primary ore that just needs more density of the core drilling in order there, but they are qualifying as for proved reserves. So cashing on it would be a word I would use to the existing ore body is much different than exploration, but if you look at our monthly report on ore, analyst analysis where we have message, thank you, we're honored these were all exploration as you did an intercept any were from 0.5% copper and stuff we're doing in Africa, the cores ores have been at least average 3 to 5% copper and 0.5% to 2% cobalt, so we've in our efforts here, we've the opportunity to be drilling exploration type intercept on exploitation wells which will bode great in the future for the times here we are talking about and which is referred to when we said we have got opportunities to expand our resources without having to go out and find the ore bodies.

John Hill

Great perspective. Thank you.

Richard Adkerson

And John you were asking about the Climax and the permitting process there.

John Hill

Or may be I should just get off the queue. I don't want to hold the call, sorry.

Richard Adkerson

No, no this Climax is important to us. One of the great things about Climax is that the incredibly positive reception that the restart of that mine has received in the local community and by the state of Colorado, which is unusual obviously for natural resource companies today. But this is an area that it was, had a tradition of mining and really needed the economic velocity that the new mines will provide. But Dave, why don't you just make a comment on permitting process.

David Thornton

Yeah, John the Climax mine is progressing great. We've kicked off our engineering team and we are progressing. There is really no issues there, we don't see any issues and we expect this budget to come online in 2010 like we said.

John Hill

Perfect. Thank you.

Richard Adkerson

All right. Thanks John.

Operator

Thank you, sir. Continuing on our next question comes from the line of Brian Macarthur of UBS. Please go ahead, sir. Your line is open.

Brian Macarthur

Good morning. I just first wanted to talk about a couple of things. First of all on class I know this year-over-year you've got your TCRC down from $0.21 to $0.15 and I see just President commenting that you've just settle a lot of terms. I assume that $0.21 to $0.15 reflects all those new terms that you've just negotiated?

Richard Adkerson

Yeah. That's correct. In today world there is a tremendous shortage of concentrate for the world smelters and so the smelter rates which was, just two years ago were receiving very high returns, because of the structure of the contracts with price participation provisions are now being renegotiated with an absence of price participation and the rates that are approaching historical low levels. Again that's just a reflection of the tightness of availability of copper concentrates coming out of mines, but yes, it does reflect that in those numbers.

Brian Macarthur

And so can I assume most of its being contract, Grasberg's contract, the [Kucing Liar] contract and everything is pretty well contracted. So that's pretty hard number right now.

Jim Bob Moffett

It’s a number that, yes that reflects that considering our current state. You know that certain of our mines including Grasberg have some long-term concentrate contracts that have minimum rates and about 30% of Grasberg's production goes into the smelter in Gresik which under its original financial has a minimum rate which is averaged into those numbers.

Brian Macarthur

Right. I was going to ask, but it doesn't that eventually payout, we are allowing to capital return, I don't know when that occurs or is that?

Richard Adkerson

It had a time limit where that expires in '08. So, we will be dealing with that as we go forward with our partners there.

Brian Macarthur

Great, thanks. And the second question is just on same cost at Grasberg, I mean, they have trended up, I know for a lot over the year, $1.40 in the second quarter, $1.66 in the fourth quarter and I am realizing the volume that is going down from 234 million pound to a 183, so there is a big volume affect. But if you could just maybe just elaborate if there is any other extraordinary other than oil, the regular step that's kind of cost there to go up dramatically or is it just all volume and natural input cost increase.

Richard Adkerson

Is just that, I mean, Brian the volumes obviously you have X divided Y and Y is half. I mean the volumes are going to go up just by arithmetic. But also the Grasberg over the years is now a mature mine it's a kilometer deep, its 2.5, 3 kilometers across. So, holes are longer, that means you burn more fuel. You have more -- in those conditions particularly with the weather and altitude maintenance cost on trucks or how we -- we work everyday to try to be efficient and reduce cost. But they are just overtimes and natural elements are going through. And then these will cost, we're at the market for that, that's what it is, fuel costs are [bar still balls] in the mills or what they are. So, it's nothing unusual there other than the volume factors and the general factors that affect input cost.

Brian Macarthur

Great, could I just real quick easy questions. Just following up your slides on page 28 which gives your capital expenditure, I mean, I assume client obviously Climax, Tenke and I assume the new expansions in U.S southwest are all in their budget, but in my aim is in there, is that operate those numbers yet? Have you effectively decided to do -- still, is that in those capital program?

Richard Adkerson

Yes, it's in there. I mean, we are still working on the environmental impact statement and so forth but that project is one we have a lot of confidence in those numbers during there.

Brian Macarthur

And my final one, just to be very clear, I heard you correct when you talked about your operating cash flow this year a $5 billion which is after cash taxes and everything else. Did I -- hear you say that after the $0.5 billion or 600 million that you have paid out on the old Phelps Dodge put, so that includes that one-time payment?

Richard Adkerson

It's $600 million this year.

Brian Macarthur

Fine.

Richard Adkerson

It was $800 million in the first quarter before the merger in the first quarter of '07 and in January we paid the final installment, there are no more derivatives contracts for our mining operations whatsoever. And that's $600 million is there and that's the difference between the $5 billion and $6 billion of annual cash flow. We have been talking about $6 billion to $3 copper.

Brian Macarthur

Right, great, thank you very much Richard.

Richard Adkerson

All right, Brian. Good to hear from you.

Brian Macarthur

Thank you.

Operator

Thank you, sir. Continuing on our next question comes from the line of Victor Flores of HSBC. Please go ahead sir. You line is open.

Victor Flores

Yeah, thank you. Good morning. I have a couple questions. The first one is fairly simple. Could you update us on what the statuses or some of the discussions that were being held in the Democratic Republic of Congo with respect to licenses? And have they said anything to you because that whole thing went sort of quite.

Richard Adkerson

It has gone quite and we have not heard official word from the government about that process. We have a lot of confidents about our contract, about the equity of that contract from the perspective of the government and our shareholders. I can tell you that the government is actively encouraging us to go forward with our projects. And to go forward faster and bigger, because the country is in dire need of employment and economic activity and taxes and royalties. So, we are hearing nothing but encouragement from the government about going forward with our project. We have not had official word on the status of the contract review. But, we believe our contract is a fair one for all parties.

Victor Flores

So, no news is good news?

Richard Adkerson

Obviously, the best news would be to get official word on it and indications are at some point we will, but it is not, I guess Victor the good news of it is we are not slowing down anything. We are spending money. We are putting resources, we are in construction. We want to get this thing all streamed and we're not delaying any exploration or further evaluation work. We want to see how quickly we can go to the Phase 2 project, Phase 3 project and phase 4 project. So, we are not slowing down at all because of this government review process.

Victor Flores

Great, thanks. My follow-up question actually has to do with the production profile and Brain just asked you about what, which of these new projects are included in the capital profile and my question goes to the production profile. Of some of these things that you've mentioned, which are the incremental production expansions at Morenci, Sierrita, Baghdad and Cerro Verde? Are those included in that production profile that you put through 2010 and is Tenke included in that as well?

Richard Adkerson

The answer to your question is yes. Obviously it is a ramp-up. We're actually going to be able to get volumes out of Morenci relatively quickly, but it will be by 2010, 2011 when we get to the full production which actually often gets over 300 million pounds a year. The average was 200, but that's what we are working towards getting that and we have some volumes for Tenke and beginning in 2009. But, at a full rate in 2010.

Victor Flores

Right. And then just is the El Abra sulfide included in any of those figures?

Richard Adkerson

It is, but it's a longer term project, and really we still have oxide ore that will be the source of volume through this timeframe. What the sulfide project does is give us the extension of that life for 10 years beyond, when we otherwise would have had been depleted. So, it does not add near term volume for to add significant reserve line.

Victor Flores

Okay. That's great. Thank you very much Richard.

Richard Adkerson

Okay. Victor. Thanks for your question.

Operator

Thank you. Continuing on our next question comes from line of John Tumazos of John Tumazos Investment Research. Please go ahead, sir. Your line is open.

John Tumazos

Congratulations on all your progress and Tim good luck in your future [endeavors please].

Tim Snider

Thank you, John.

John Tumazos

Congratulations on stepping up from 26 to 55 rigs operating near existing mines. Could you give us a review of -- in '07 how those rigs were allocated by location and in '08 what the allocation would be? It's very exciting to hear that you are adding 29 rigs near the mines.

Richard Adkerson

Yeah, John. I can talk about it in broad terms. In broad terms, as we did this and as Jim Bob talked about, we began initially looking at what was available to us potentially from the existing mines and so, we have and also we are now, as you can appreciate, we are a larger company than either Phelps Dodge or Freeport was previously. So, in that context in terms of looking at particularly greenfield projects but also in terms of looking at certain ground field projects, the projects have to be of a larger size to be impacted. So, we have our rigs away from smaller projects, particularly away from smaller greenfield projects to areas that we believe have the most potential of having significant additions to reserves and what that’s will add to doing is really putting more resources at Morenci, more resources at Lone Star, the Safford area, at Cerro Verde, where we had a very significant drilling program and a real excitement about drilling there. And then we’re going to go all out with resources in terms of looking at Tenke Fungurume and there is no limit to, there is no budget limitations for us on exploration. It’s a question of how do you affectively deploy resources and processing information. We are going after this as aggressively as we can go after.

John Tumazos

So Rich, is it fair to say that the emphasis is that the four locations you are saying rather than Candelaria or El Abra or Sierrita or Bagdad or Chino, Cobre and [Tyrone]

Richard Adkerson

You know we are still drilling at Candelaria , that basically the resource for our projects has been funded El Abra still some work going on there. We are certainly looking at Sierrita and doing active drilling in that area. And then drilling to a lower extent in some of the smaller mines to see what we have there. So, we have a broad scale of program, just talking about the strategic emphasis is going to be in those areas where we have the opportunity of having largest scale projects.

John Tumazos

And Rich, you did mentioned what those first four mines Grasberg, I presume there already was a big effort in Grasberg and you don’t need to add to it.

Richard Adkerson

I think I did say that we are not going to have any limitations on what we are doing in Grasberg. I mean we are drilling there. We are back out in outside Block A this year and the fact that we put more rigs in Africa doesn’t have any impact on what we are doing in Grasberg. I mean we are looking at -- we are going after it just the same way we were or would have done have we not the merger.

John Tumazos

Thank you for the update. And good luck with the drilling.

Operator

Thank you sir. Continuing on our next question comes from the line of [Lawrence Jollen] of Lehman Brothers. Please go ahead sir. Your line is open.

Lawrence Jollen

Good morning. I wanted to touch on the revenue adjustments. I guess starting with Indonesia, if you go to exhibit Roman numeral 18 on a per pound of copper basis there is essentially a loss of $0.55. I just want to confirm that those are the revenue adjustments related to the difference between provisional pricing and final pricing?

Richard Adkerson

Yes, that's correct. That's the fact that and there is accepted accounting standards of how you deal with this. SEC has been involved and directing how this was done. So that means at the end of third quarter we used forward market copper prices to price the open pounds in Indonesia. Those pounds basically priced during the fourth quarter and because the price went from $3.70 to $3 at lower prices, then you had that downward adjustment. In the third quarter and earlier quarters, the price goes up, you get the upward adjustments. That's what that is.

Lawrence Jollen

Okay. So in theory, I know you are positive on the outlook, but in theory the copper pricing continues decline below the $3 level you will kind of have the double whammy hit of 50% of your sales or at spot and then the other 50% there would be another revenue adjustment down or is that correct?

Richard Adkerson

It's not, its spot and that's, when you look at the overall numbers and the difference between the consensus analyst expectation and where we are, is the fact that the half the production during the quarter is priced at the quarter end price.

Lawrence Jollen

Okay, sorry if I used the term spot. That's incorrect.

Richard Adkerson

Right.

Lawrence Jollen

Okay.

Richard Adkerson

So yeah, it's either a double whammy or a double goodie.

Lawrence Jollen

Can't think.

Richard Adkerson

Price goes up or the price goes down.

Lawrence Jollen

Okay.

Richard Adkerson

And it's just an accounting convention, the actual cash that we realized from these contracts is spread over the periods. It's a delay from shipment, not the one to three months open quotational period and that can either work to be to our benefit in the rising price environment or it would be lower if the prices drop in relation today the shipment. But this far, this is just an accounting convention and you've actually described how it works.

Lawrence Jollen

Okay. And then just to be clear, in South America you had a similar what I would say a hit of $0.40 per pound of copper. But in North America, I really didn't see, I only thought $0.07 per pound hit.

Richard Adkerson

And the reason for that is in North America, we essentially produced copper cathodes through SX/EW operations. It's a bulk of our business and so you don't have -- and then we convert that cathode into rod and we provide just under half of the copper right to the United States market. So you don't have the concentrate open pounds situation those are sold at prevailing prices at the time they shift customers. And in South America we have produced both copper cathode at El Abra. And then we produce concentrates at Congo area. We've also produced concentrates at Cerro Verde and they have the impact that's like we do in Grasberg.

Lawrence Jollen

I appreciate.

Richard Adkerson

There is my point about why, I said about half of our copper is priced that way because of the mix of our business.

Lawrence Jollen

That's great. I appreciate the clarification. And then lastly, as we think about free cash flow in the first half of the year and specifically in the first quarter, I just wanted to confirm that these $600 million settlement of the copper hedging will essentially be a reduction of payables and will be picked up in working capital so they hit, the cash impact will be hit in working capital, is that correct?

Kathleen Quirk

That's correct.

Richard Adkerson

It's already happened.

Lawrence Jollen

Okay. I wanted to make sure modeling it correctly. Okay.

Richard Adkerson

Yeah.

Lawrence Jollen

Thank you very much.

Operator

Thank you. Continuing on, our next question comes from the line of Justine Fisher of Goldman Sachs. Please go ahead. Your line is now open.

Justine Fisher

Good morning.

Richard Adkerson

Good morning.

Justine Fisher

I do have a quick question to clarify the CapEx spending in '08, I know that you guys have given some good detail about how much offend on each of your expansion projects but is there anyway you could clarify with the largest expenditures for projects will be in '08, in other words which of the expansion projects will be represented I guess by most of that $2.4 billion?

Richard Adkerson

Okay. Let me see here the biggest chunk is going to be Tenke Fungurume, which will be roughly $500 million. The Climax restart, which is roughly half of that and underground mine development in Grasberg.

Justine Fisher

Okay. And then it seems from I think even consensus estimates and certainly the way we run our numbers that, you guys have more than sufficient cash flow to finance CapEx and I was wondering if you would think about drawing down on any (inaudible), it doesn’t seem necessary, but would you another reason to keep more cash on hand rather than using cash from operations for CapEx?

Richard Adkerson

No, we have no need to keep cash in the business and we're going to use all of our available cash. We still, because of the timing of cash flows, expect that we will have some draws under our credit facility during the first half of the year and those would be fully repaid in the third quarter.

Justine Fisher

And not just because of $600 million payment and then uses of working capital for other reasons here?

Richard Adkerson

There are three factors, one is our volumes are split, one quarter in the first half and three quarters in the second half. So, you've got lower volumes in the first half. The second reason is the $600 million payment and the third reason is other working capital uses, principally we made so much money last year that we're writing the governments around the world big cash checks for taxes and those will be in payments for first half of the year.

Justine Fisher

It sounds like that’s not too bad a reason to have the use of cash and then.

Richard Adkerson

We are not complaining, we're -- in all of this turmoil that's going around the world as we look at our business, as we talk to our customers, as we look at just thinking back about where we were at year ago and what risk we might be facing. We don't see the world quite as badly as lot of people. Its kind of maybe the general consensus view as right now, we understand the risk, but we are just real happy about where our company is financially and operationally and a from a growth standpoint.

Justine Fisher

Okay. And then I just have one last quick question. Could you update us on the labor situation in Latin America? I know that there is some new issues with subcontract workers down there and they are not particularly with your mines, but some court decisions that could maybe change your labor costs there?

Richard Adkerson

You are right. Well, we do have labor contracts for our workers that are coming up for review this next year and the next year. We have less significant use of contractors in our operations than some of the others miners there. And overtime we've had policy of increasing the work done by our employees and decreasing contractors and we are continuing to do that. That is the factor for the industry there. But from our standpoint, we have good relationships with our workforce and our contractors and we feel good about being able to respond to the changing conditions.

Justine Fisher

Superb. Thank you.

Richard Adkerson

Thank you.

Operator

Thank you. And our next question comes from the line of Brett Levy of Jefferies & Company. Please go ahead. Thank you.

Brett Levy

Hey, guys. Most of my questions have been answered. But, in terms of the stock repurchasing that looks like it's about a 1.5 billion. Is that at all price sensitive in terms of sort of when you wonder into the market and do you plan on doing all of that during early 2008, all of 2008? Can you give some sense of timing?

Richard Adkerson

Alright. Let me, let me summarize that. We have historically executed our cash purchases of shares in the marketplace as we generate cash and in response to market conditions. From the conversation that I just had about the cash flow generation of our business, we are not going to be generating excess cash during the first half of the year, but we will be generating it during the second half of the year and we're going to look at conditions. We never wanted to be more specific in that in terms of how we execute this program, because it is a situation that's driven by the marketplace and our cash evaluation. So all I will say is that's the facts relating to our cash generation and we have this authorized and we'll talking with our board and making decisions about how to execute it over time.

Brett Levy

Got it. Alright, and then in terms of, you've mentioned that this is kind of your target level of debt until sort of the nature of the company changes. Have you talked to the rating agencies about that and have they had any thoughts about whether or not to kind of move you up or not at all?

Richard Adkerson

We've ongoing discussion with the rating agencies and we'll continue to meet with them and talk about our plans and update them on our progress. We now have a positive outlook from both agencies. We're one notch below investment grade for our corporate rating. We have very strong credits statistics for high yield issue. The rating agencies are obviously where they are right now in terms of the overall financial markets and all I can tell you is as we have we'll continue to work with them to get what we believe will be an appropriate rating for our company.

We don't have need to go into the marketplace for new capital right now. We are generating excess cash, we are paying down debt and in fact while we are at a attractive debt level, if we have opportunities that are economically positive for our company, we could well use some cash to take advantage of those. So we have a lot of flexibility what we will do financially. We are not dependent on rating agencies, we are going to work hard to get the right agency rating for what we consider the right rating for our company.

Brett Levy

And that's leads to a very last question which is do you have any long-term ambition that's been investment grade?

Richard Adkerson

We've always been able to operate effectively and as a non-investment grade issuer we were able to do this transaction and finance it efficiently. So in terms of saying that it is an overriding goal we won't say that. Our principal goal is going to be building value for our shareholders. We believe that our company should qualify as an investment grade rate credit and we are going to continue the management on the basis that we laid out here today and work with the agencies to see if we can get the right rating, but we are focused on having what we and our board considered to be a strong balance sheet and in providing good returns for our shareholders.

Brett Levy

Fantastic. Thanks very much, guys.

Operator

Thank you, sir. Continuing on our next question comes from the line of Charles Bradford of Bradford Research. Please go ahead. Your line is open.

Charles Bradford

Good morning. You got a series of footnotes on page roman numeral IV including c what talks about a 125 million of purchase accounting, cost added depreciation but there was also one d that talks about $96 million of addition cost. Can I assume that those will go away?

Kathleen Quirk

That's the historical cost of G&A associated with the PD activity, the Phelps Dodge activity.

Charles Bradford

Right. The $96 million seems like it was almost a one timer?

Kathleen Quirk

No, it's not a one timer, that is the ongoing G&A associated with the Phelps Dodge part of the business.

Charles Bradford

Okay. So, we can continue to see the G&A as high as it was in the fourth quarter?

Richard Adkerson

Well, there were some, I wouldn't look at the fourth quarter alone because there was, Chuck, this was a complicated year related to a number of factors. You point out to the purchase accounting issues and under -- days accounting rules that's a tremendously complex undertaking. The accounting standards in particularly the way the SEC interpret some of requires to do all of this detail valuation analysis and that comes. And then, again this year was also a year in which we were taking steps to integrate our business and that may integrating compensation plans and employee benefit plans. We had a number of people in the -- particularly in the finance administrative area of Phelps Dodge that left and they had pre-established severance plans. So, there were some unusual cost flowing through this year and I wouldn't look at any particular quarter, but look at the cost overtime.

Kathleen Quirk

But the purpose of the foot note was really to point out, when we're comparing the fourth quarter of 2007 with the fourth quarter of 2006. The fourth quarter of 2006 was historical Freeport and didn't include the Phelps Dodge operation. So, we are just to help to understand those changes.

Charles Bradford

And what kind of tax rate can we look forward to, for ongoing quarters because you also pointed out that one reversal that affected the tax rate in the fourth quarter and also affected the minority interest?

Richard Adkerson

All right. The two things -- yes, I guess, to talk about on these calls are, one the provisional pricing and two the tax rate. The tax rate Chuck is going to be driven by the proportion of total income that PT-FI contributes. We have a much higher tax rate in Indonesia than we do in South America or Central America. And so, if PT-FI is contributing a significant amount of the income, then the overall average tax rate will be higher. In quarters where PT-FI is contributing relatively lower income as it was during the fourth quarter, our tax rate is going to go down. The tax that we pay on our income in these countries is essentially fixed. I mean, it doesn't change, it's just how the mix comes about between those tax rates. And so, as we look forward in 2008, I will tell you and we'll put this in our 10-K, so all the world have it. We are currently looking at the kind of commodity prices that we had at roughly an annual rate of 34%.

Charles Bradford

Okay.

Richard Adkerson

Now that will vary quarter-by-quarter because in the early part of the year PT-FI will be down -- will be higher later on.

Charles Bradford

And can you give us an estimate of depreciation including the further purchase accounting number for '08? It looks like about a 1.6 billion.

Kathleen Quirk

We'll get that for you.

Richard Adkerson

Hang on just one second.

Kathleen Quirk

Including the $940 million that we talked about in the press release for the actual depreciation associated with the step up in assets, we're estimating about $1.9 billion.

Charles Bradford

1.9 billion?

Kathleen Quirk

In annual depreciation.

Charles Bradford

Thank you.

Richard Adkerson

Alright, thanks Charles.

Operator

Thank you. And continuing on our next question comes from the line of Ken Silver of World Bank of Scotland. Please go ahead, sir. Your line is open.

Ken Silver

Hi, good morning. My questions were answered. Thanks.

Operator

Thank you, sir. And therefore it appears that our final question will come from the line of [Sunil Dattadhar] of Centennial Asset Management. Please go ahead, sir.

Sunil Dattadhar

Thanks. I have just two questions, one on the supply side in the industry wide. Do you see that supply is going to be tied from the industry for copper production in 2008 and 2009 also or you think that supply might increase probably given what the conditions of the economies are?

Richard Adkerson

Let's see, I missed the first part of your question. What is it?

Sunil Dattadhar

On the supply point of side, do you think that there might be some industry wide problems that may continue in 2008 that were in 2007 likes mines disruptions or labor disruptions, that may cause supply to dwindle and supply might remain very tight in 2008?

Richard Adkerson

And you're talking about industry wide conditions?

Sunil Dattadhar

Yes.

Richard Adkerson

Well, you know since the recovery from the last U.S. recession during the early 2000s, I guess the global recessions and since China became such dominant factor. The industries productive capacity has been stretched and that means the cost prices rose. We and all the other copper producers are trying to produce as much copper as we possible can. Prior to that time an estimated 5% of the industry's capacities including some of Phelps Dodge's operations were curtailed. But with high prices you can rest assure that everybody is going to be out there trying to produce everything they can produce and in that environment when you have aging mines and all the major mines around the world today are aging, pits are getting deeper, I mentioned with our Grasberg pit it resolves in geotechnical issues and you can see that in number mines around the world. All the operating systems are stretched. Workers around the world are looking for greater participations so there has been a recurring series of strikes and unrest with contractors and other issues.

All of these factors mean that there is a supplier side's response, its inevitable, that's going to be negative for supplier. And the conditions we have today in the industry are no different than they have been in recent years. And the likelihood is we don't know where it is or it will occur, but there will be mines that are currently producing at 2007 that won't produce what they expect to do in 2008. And I don't think there is nothing around the world today to change that. There is no slack in the system.

Sunil Dattadhar

You mentioned during the commentary, in the presentation that the demand for copper in the U.S. is relatively good against what -- .

Richard Adkerson

Let me clear that, I said the market is tight. The demand in the U.S. has been affected for copper by the weak residential housing market and that was evident in the last half of 2006 is continued in 2007. Our fourth quarter in the US in 2006 was weak and our fourth quarter in 2007 was about the same as it was in 2006. But then also in the US, automobile industry is weak and yet globally the automobile industry is strong. In the US there, and this is almost totally a US issues, but plastics are taking market share away from copper and plumbing applications. But having said that, the US non-residential market has been relatively strong and while, overall demand is down, the US is a much less significant part of the world's copper used today than historically, roughly 12% and the weakness in the US has been offset by the strength in the global economy. So, it would likely take from a demand standpoint, a global recession to have a major impact on copper demand. Its not going to occur as a result of supply side factors. The supply side situation in terms of current production levels and new projects coming on stream continues to be very supportive of the copper price.

Sunil Dattadhar

Okay. And just from China's perspective, have you seen any kind of change in China's pattern, buying patterns, given what the turmoil's in the financial markets are, or in the economies are, have you seen any kind of change from China? Are they sort of continue to

Richard Adkerson

We saw heavy indication of change in China during 2006, when the copper price reached $4 a pound in May and there was an absence of Chinese buying in the last half of 2006. A year ago the copper price was below $2.50 and that primarily reflected Chinese buying patterns. Chinese came back in the marketplace strong in 2007 and so yes, at any point in time copper prices are going to be influence by buying patterns by investors sentiments, by funds flow and all those things and all that will happen around us and it will effect our price in the way the market use us.

From our standpoint, we look going to longer term basis and look at just how difficult it is to produce copper and find new projects and that's why we are very encouraged about where we are. Longer term the world is going to need copper as the undeveloped places in the world including China, India and other places develop only copper. The world is going to be increasingly focused on energy, conservation and how to use less energy for economic and environmental reasons. And every application where that comes into plays requires more copper. And for a number of factors we are just really encouraged, although we'd never try to predict and have no confidence in our ability to predict what's going to happen in next week, next months, in the short-term, in the marketplace but we are running our business with a very positive longer term view of our marketplace and that's the way we are working today.

Sunil Dattadhar

Okay. Well, thank you.

Richard Adkerson

Thank you. Everyone we really appreciate your participation on the call. If you have follow up questions, please feel free to call us. We look forward to reporting our progress as we go throughout 2008 and appreciate your attention and interest in our company.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again and have a great day.

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Source: Freeport-McMoRan Copper & Gold, Inc. Q4 2007 Earnings Call Transcript
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