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

Q1 2008 Earnings Call

April 23, 2008 10:00 am ET

Executives

Kathleen Quirk - EVP, CFO and Treasurer

Richard Adkerson - President and CEO

Jim Bob Moffett - Chairman

Red Conger - President, Freeport-McMoRan Americas

Dave Thornton - President, Climax Molybdenum

Mark Johnson - SVP and COO

Analysts

Michael Gambardella - JPMorgan

John Hill - Citi

Oscar Cabrera - Goldman Sachs

Victor Flores - HSBC

Brian Macarthur - UBS

John Redstone - Desjardins Securities

Mark Liinamaa - Morgan Stanley

Daniel McConvey - Rockford Investments

John Tumazos - Private Investor

David Cohen - JPMorgan

Brett Levy - Jefferies

Sanil Daptardar - Centennial Asset Management

Lawrence Jollen - Lehman Brothers

Edward Okine - Wessler Capital

Operator

Good morning ladies and gentlemen, thank you for standing by. And welcome to the Freeport-McMoRan Copper & Gold First Quarter 2008 Conference Call. My name is Jessica and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and CFO. Please go ahead Ms. Quirk.

Kathleen Quirk

Thank you and good morning, everyone. Welcome to the Freeport-McMoRan Copper & Gold first quarter 2008 Earnings Call. Our earnings announcement was released earlier this morning and a copy of the release is available on our website at fcx.com.

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

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 materials and to the risk factors described in our SEC filings.

On the call today is Jim Bob Moffett, Chairman of the Board; Richard Adkerson, President and Chief Executive Officer. We also have several members of our senior operating team here on the call that Richard is going to introduce in a few minutes. I am going to briefly summarize our financial results and turn the call over to Richard who will be reviewing our operations and outlook and will be using the slide materials that are on our website. We'll then open the call for questions.

We are pleased today to report our first quarter 2008 net income applicable to common stock of $1.1 billion that was $2.64 a share compared with $476 million, which was $2.02 per share for the first quarter of 2007.

Our first quarter results included net losses on early debt extinguishments totaling $6 million, that was $5 million to net income or $0.01 per share in the 2008 period and in the year ago quarter $88 million or $75 million to net income, $0.31 per share. Our results for the 2007 quarter include the operation of Phelps Dodge beginning March 20th of 2007.

Our sales from our mines during the first quarter 2008 totaled 911 million pounds of copper, 280,000 ounces of gold and 20 million pounds of molybdenum as compared to 520 million pounds of copper, 956,000 ounces of gold and 2 million pounds of molybdenum reported for the first quarter of 2007.

Our first quarter 2008 sales were higher than our previous estimates that we reported in January for the first quarter of 885 million pounds of copper, 170,000 ounces of gold and 19 million pounds of molybdenum.

Compared with pro forma period for the year ago, which included the pre-acquisition of Phelps Dodge sales; the first quarter 2007 amounts were a billion pounds of copper, 977,000 ounces of gold and 19 million pounds of molybdenum.

Our quarter benefited from strong commodity prices. Recorded prices averaged $3.69 per pound in the first quarter of 2008. That was about 23% higher than in the first quarter of 2007. The 2007 recorded realizations were impacted by $0.07 per pound reduction for mark-to-market accounting adjustments associated with the 2007 copper price protection program. As you recall, that was completed in 2007 and we financially settled that transaction for just under $600 million in January 2008.

Our first quarter 2008 realizations of 369 were heavily weighted to the applicable forward prices at the end of the period because of the open pounds and that was 382. Those were recorded 382 at the end of the quarter.

Our operating cash flows which were reduced by $1.3 billion during the quarter for working capital uses including the settlement of the copper hedges, totaled $615 million for the quarter and our capital expenditures approximated $508 million in the quarter.

We ended the quarter in a strong financial position our total debt approximated $7.6 billion. We had consolidated cash of $1.8 billion. At the year end 2007, we had total debt of $7.2 billion and $1.6 billion of cash. We borrowed just under $300 million under our revolving credit facility during the quarter for short term borrowings to fund a portion of the working capital requirements.

As we indicated in the press release we've had recent upgrades from our rating agencies, most recently we had upgrades from both S&P and Fitch to BBB- Minus.

I would now like to turn the call over to Richard, who will be referring to the slide, materials including on our website.

Richard Adkerson

Good morning everyone. It’s real pleasure to report to you the results of our first quarter for 2008. As Kathleen indicated, we have with us today our senior operating management team, as we previously reported Tim Snider, officially retired April 1st, although he is here in our office continuing to work with us on a consulting basis.

Our operations are now managed by a team of five experienced management personnel, including three long time veterans from the Phelps Dodge organization. Red Conger who is President of our Americas operations is here, as is John Marsden who manages Freeport-McMoRan Mining Company, which handles construction, our technology our exploration and growth projects. Dave Thornton manages our important Molybdenum business and is overseeing operation at Henderson as well as our expansion project at Climax. Mark Johnson who is a long time Freeport manager, who many of you know continuous to be in charge of operations at Grasberg and Phil Brumit is the fifth member of team who's actually here in United States not with us today, but he is managing our Tenke Fungurume project living in the Congo, joined our organization after a distinguished career with Newmont where he managed the startup of the Batu Hijau mine in Sumbawa in Indonesia.

In the interest of time I am going through the slides, but our team will be available to answer questions that you might have relating to their areas of operations. If you'll turn to page three, you'll see a picture of our new annual report, which was recently published, and the theme of our report this year is 'A World of Assets, A World of Opportunities'.

The 'World of Assets' refers to our current operations, our producing operations which has strong capabilities of producing copper and our other products as we can see in the first quarter supported by long life proved and probable reserves, with reserves that we have.

The 'World of Opportunities' refers to what we are actually doing and that’s expanding our production volumes in an industry where sustaining production and expanding is very challenging for many reasons. We also have the opportunity that we are pursuing aggressively of evaluating our existing ore bodies to find the opportunities to extend the lives of our mines and provide for future expansion projects, and we have the opportunity to pursue and develop significant new ore bodies. Our strategy is clear cut, we are focused on our internal opportunities and our operations and we believe it’s a fabulous opportunity to create value for our shareholders.

The first quarter was a record quarter for us. And it was a record quarter even though from a volume standpoint from terms of copper production it looks to be our weakest volume quarter for the year. As we’ll have increasing volumes as we move later on into the year as Grasberg returns to the high grade core of that great ore body as our separate mine ramps up and as we continue to pursue our program of safely expanding operations.

But having said that, given the very strong prices for copper, gold and molybdenum it was a great quarter for us, over billion dollars of net income, and the ability to generate cash. We had to use some of the cash this quarter to pay the final payment on the legacy Phelps Dodge hedge program and for other working capital uses. But we are very pleased with where the company is financially.

We have executed on the financial plan that we set forth some time ago, that's being reflected in our balance sheet, as we were upgraded to investment grade ratings by both Standard & Poor's and Fitch during the quarter. Didn’t change our policy to do that, we just carried out our plan and the results resulted in the higher rating.

If you turn to page five, you can see where those volumes came from in this quarter. For the year, we really expect to be pretty equally weighted between North America, South America, and Indonesia. In the bottom right corner, you can see just what the variance was between the first quarter of '07 and first quarter '08 in Indonesia. At Grasberg in the first half of '07, we were in the very high grade section of that mine, generated substantial volumes. We sequenced out of that, beginning in the second half of '07 and by mid year we will be returning to that. Just to reflect back, it would be much different conference all if we are reporting on the basis of all FCX for the first quarter with those relative results.

Page six, shows what our unit cost, production cost were for the quarter. These are unit costs, so the fact that we had lower volume results and higher unit costs, but having said that cost pressures in this industry are very significant. Energy cost, of course, with oil approaching $120 a barrel affects everybody in the industry, but steel cost and other input costs, sulfuric acid costs are very significant elements and are really important factors for the industry. This cost pressure makes it more difficult to develop new projects to sustain production at older projects. And in turn creates significant values and the fact that we have using properties and reserves that generate very strong margins even with the higher cost in the market environment that we have.

Page seven, talks about the impact on our first quarter from the changes in the copper prices. If we go back three months ago to when we were reporting our fourth quarter results, we were seeing the mirror image of this. During the fourth quarter of '07, the price of copper dropped dramatically from $3.70 a pound to $3 a pound. Now we saw the price go from the $3 level to back to $3.86 and this has a positive impact this quarter on our reported results, because of the nature of the way that our copper concentrates our contracts are priced. They are provisionally priced at the end of the quarter, they settled from a month to most of them up to three months after shipment and the quarter end price is a major determinant in the average of quoted price that we report in our financial statements in any quarter.

At March 30th we had 362 pounds of provisionally priced copper at $3.82 a pound. We receive over time the market price for copper. This is simply the fact that we have to account for this way because we have to draw a line in the sand at the end of each quarter. This has two impacts on the first quarter we had an upward adjustment from the fact that open pounds since the beginning of the quarter were priced at $3 a pound and the prices rose. That added almost $300 million to our revenues for the quarter. And that the quoted price realized of $3.69 a pound was more than the first quarter average market price of just over $3.50 a pound. So any way this will be something that is an ongoing feature of our financial statements and as I talked about three months ago. This had a negative impact then and a very positive impact now.

Page eight, has price charts. The world is driven today from a commodity standpoint by demand in China and the developing world and that continues to be very strong. The economic conditions in the US are affecting copper consumption here, in the housing market, in the automobile market, and beginning to see effects in the commercial markets. But yet, the US is a relatively small factor in the marketplace. We sell all of our copper around the world including in the US at the global price. And we have the ability to sell all of the copper we can produce and plants product at market prices. And the market continues to be very tight globally, and the market outlook is very strong.

Our sales outlook for the year at 4.2 billion pounds of copper, 1.4 million ounces of gold and 75 million pounds of molybdenum will allow us to generate significant profits and cash flows during the reminder of 2008 on a model projected basis at 375 copper, $900 gold and $30 a pound Moly. We would generate operating cash flows of $6.5 billion for 2008. We dealt with the working capital requirements in the first quarter, 70% of our cash flows will come in during the second half of the year. Our revised capital expenditure outlook is $3 billion; I'll talk about that a little bit more. We are continuing to look for ways to spin capital, because we want to take advantage of the opportunities that we have. But our projects are also being affected by the very substantial escalation in capital costs that's facing the mining industry today.

Our projects are progressing. The Safford mine is the new mine in Eastern Arizona SX/EW facility that where we completed, since we completed construction by year-end '07 and we are now ramping it up to produce 22 million pounds of copper in the first quarter. We are moving by mid-year to produce at the designed rate of 20 million pounds a month; a very efficient operation with significant opportunities for expansion as we look forward.

In the historical global mining area, where we have significant reclamation activities on going from old mining operations, we are restarting the Miami mine to help facilitate those reclamation activities and make some money doing it. We announced in 2007 incremental expansions in North America at Morenci, Bagdad, and Sierrita. We are looking for bigger opportunities there, but in the meantime we are spending some capital to add some incremental production. Scoping studies indicated capital of $370 million for those three projects, ability to add 180 million pounds a year copper. We are studying the engineering for that. The cost and scope may change as we go forward, with that as we look at larger expansions of those properties.

We are really excited about the new project in our molybdenum business, reopening the Climax mine near Leadville, Colorado. Construction is beginning by moving snow there, I think there was over 300 inches of snow there this winter. But we are looking forward to the spring run off and actually putting equipment in the ground. We've ordered the equipment. Everything is in line. We have the major permit that we had to obtain to go forward $500 million high rate of return project because of the positive marketplace. We are continuing to drill there. We have an expectation of adding reserves. This initial project has a designed production capacity of 30 million pounds a year. We know we could double that of what we have now and there is an opportunity to look for more reserves, long mine life, just a great project in a market that's very attractive.

We just returned from South America and visit our operations there and moral is high, our people are very excited about what we have available to us there. Red’s team is doing a great job and managing those businesses and looking for expansion.

El Abra, has been a very productive oxide SX/EW operation has the worlds largest tank house at its site. We are nearing the end of the oxide resource. We have a sulfide resource. As mineralogy, that's mean able to leach and we are in the process of going forward with a project there. We have the government approval to proceed with a new project that will extend the life of this mine for more than 10 years and we are beginning construction with that project to develop sulfide or resource that's available to us.

Cerro Verde, in Peru is a mine where we had an expansion that was completed right at the end of 2006. We ramped up in 2007 to triple its production level and this is a resource that has the opportunity to be expanded in a significant way in the future. We are doing drilling there, we are undertaking studies about environmental issues, water power issues but the location of this mine, the footprint all of these things point to get me a excellent opportunity to be a growing part of our asset base in the future.

Indonesia, having performed very well the Grasberg mine, is of course one of the mining industry's great ore bodies its what allowed our company to create a company that we have today and we continue to look for opportunities there, in addition to the open pit where I just pointed out. We met the challenge that we've been facing for years in terms of meeting our mining rate objectives there. Our mining rate was in excess of 700,000 metric tons a day and Mark and his team did a great job in moving the material which exposes the ore for us to generate the kind of volumes that we have available to us.

Besides the pit, the DOZ mine is one of the world's, if not the world's largest single block caving operation, originally a 25,000 ton per day mine operated during the first quarter at over 60,000 metric tons a day. We are expanding it to have a sustained rate of 80,000 tons per day. We are now beginning to do mine development activities under the pit at the Grasberg block cave operations. Our new Big Gossan mine is on track to produce in 2011 and we have continued to optimize our milling operations, the world's largest single site milling operation in the industry and it has always have been a star of our operations but we continue to drill at Grasberg and to look for more reserves. The opportunity to optimize operations as we go forward.

In the Congo, we are very excited about what's available to us there. This is a very large concession of 600 square miles, which is yet to be fully understood from a geologic development standpoint and we are working hard to gain that understanding. We are increasing our drilling activities, we are undertaking exploration processing analysis to see where ultimately we might go with this and our expectation is that we will be able to undertake a series of development projects focusing initially on the oxide resources and ultimately going to the mix store in the sulfide resource that's there and is yet undefined.

Capital costs have risen substantially and our new estimate for aggregate cost is $1.75 billion plus another significant amount to develop power for this operation. This is a significantly higher cost and we were looking at when we made our acquisition a year ago and that reflects several factors. One is we put a new team there and based on our experience in developing the Grasberg mine and developing a structure that will allow for future expansions. We are developing more supportive infrastructure than initially was contemplated. We are looking at a larger tailing deposition area. We are looking at more housing. We are looking at more onsite personnel to mange the operation, so it can be done in the right way. We are looking at more investments in social programs and some community activities.

In addition, the industry, as I said, is facing significant cost escalation. You can see that as you listen to every company's reports about their own projects and that certainly is a factor in doing business in the Congo and we build those into our new estimates. It's a challenge to do business there. That's not a surprise anyone and as we gain more of an understanding of how to operate there, we are seeing more cost. Having said that, the opportunities for the resource are very significant and we are aggressively going after it and not lost any enthusiasm about it.

We've reported that the government is undertaking a review of all the contracts in the country including our contract. We are responding to issues that the government have raised we are meeting with an inter ministerial group that's been formed to review the contracts and we feel very positive about the direction of those discussions that remain to be resolved and we will be continuing to work with them and report to you the results of this as we go forward. We have confidence based on our discussions with the government and the encouragement that we are receiving that we will be able to proceed with our project in a satisfactory way.

We have construction underway now, we have over 2,000 people onsite working. We have management personnel that are living at site. We are providing support from our headquarters group. John and his team were just there for over a week onsite dealing with our contractors and our plans. You can see the picture on page 15 that we are making progress. Our current target is to bring this into production during the second half of 2009 with our initial projects.

As I mentioned the real focus in this world of opportunities is looking at our existing ore bodies and what's available to us is an indication of that. The bar chart on page 16 shows what our current reserves are in terms of recoverable proved and probable. Copper that's located in our ore bodies is priced at $1.20 a pound for long-term prices and significant reserves of over 90 billion pounds. But beyond that based on drilling today and we are continuing to drill more and gain more of an understanding. We have roughly an equivalent amount of contained copper in mineralized material at $1.50 a pound and that just gives us opportunity to work to convert that to reserves and then to producing assets.

We are doing active drilling, we have more than 80 drill rigs operating around the world and North America focusing on Safford, Lone Star, Morenci district, in South America, focused at Cerro Verde where we have significant resources, at Grasberg in block A and also now drilling has commenced outside block A and at Tenke Fungurume which on that very large concession has plenty of drilling opportunities and both surface exposures of minerals and also significant indications of minerals in areas that don't have surface expression. So, it's a tremendous opportunity for us.

We have upped our exploration budget. Shown on page 18, to $180 million for the year and you can see how that's distributed around the world. I mentioned growing volumes on page 19, expanding from pro forma 2006 before our merger, combined 3.6 billion pounds up to a level that we are targeting 4.8 billion by 2010, very significant stair stepped expansions there. You can see how our mine plan is affecting Grasberg, where essentially all of our gold sales are, the chart at the top page 19. For those of you who follow Grasberg we have on the website the sequencing charts that we have updated so you can see how our sequencing over the five year period will affect our access to the higher grade ore overtime.

Page 20 comes back to this issue I started with. This is a record quarter and that you can see from a volume standpoint, we are looking to have significantly stronger quarters in the second half of the year, as Grasberg get to higher grade and as Safford ramps up. So depending on commodity prices, we have opportunities of having extraordinary financial performance as we move forward in 2008. You can see fourth quarter goal to get us approaching 600,000 ounces, which we've done that in more Grasberg in the past.

These increased volumes will have positive impact on our unit cost and we are currently projecting given $900 gold, $30 moly, net of by-product credits, average unit cost of $1 a pound for the year and you can see how that breaks out regionally.

We've updated our modeled projected cash flow charts on page 22, increase the price levels that we used to reflect market conditions. This just shows $3 to $4 a pound and you can see 350 a pound our annual average operating cash flows, for the two years. It is roughly $7 billion. Annual averages, use whatever prices you want. The variance amounts are shown on page 23, $0.20 change in copper, is $575 million impact on operating cash flows.

Capital expenditures, as I mentioned, have been updated to reflect the new higher cost estimates at Tenke Fungurume and escalations at our other projects and our continuing opportunities to invest. We are now looking at $3 billion for '08, 2.4 for ’09 and 1.3 for '10.

Page 25, to illustrate the free cash flow generation opportunities for our business. We show our operating cash flows reduced by our capital expenditures, are roughly $1 billion requirement for our current annual common and preferred dividends and show just how much excess cash flows that we would be projected to have using our outlook for operations and just modeled prices at 350 copper over a two period we'd have excess cash flows that would exceed $5 billion.

In closing, I just want to reiterate the clear cut financial policy that our Board has set for us. We are committed to maintaining a strong financial position, we've gotten our balance sheet to the point of where we were targeting that and we have now two credit rating agencies that consider our company to be investment grade rated. The continuation of the positive copper markets and we're optimistic about markets over the longer term and we recognize risk as always but the market continues to be fundamentally strong supported by a growth out of China and the challenges of the industry to produce volumes and develop new projects.

With positive copper markets we will be generating substantial cash flows. Since I just pointed to this allows us to invest aggressively within our business to grow near term volumes and develop longer term opportunities. And we're going to look opportunistically for situations that allow us to reduce debt. We don't have debt maturities but the dislocation of the credit markets may give us an opportunity to reduce debt on an economic basis and we're focused on shareholder returns as a way of maximizing our long term shareholder value.

That's through an aggressive dividend policy, which we will be reviewing as we go forward, and we have an approved share buyback program. We didn’t buy any shares in the first quarter as we weren’t generating cash flows in excess of our working capital requirements. But in the second half of the year we'll be generating very substantial amounts of cash flows, which will allow us to consider opportunities to execute on our share buyback program.

With that, we've summarized our great quarter here and I'll be happy to respond to questions. Our teams here available and Jim Bob's is on the line as well.

Operator, can we open the line for questions?

Kathleen Quirk

Operator?

Question-and-Answer Session

Operator

The first question comes from the line of Michael Gambardella of JPMorgan.

Michael Gambardella - JPMorgan

Hello, good Morning and congratulations on another great quarter.

Richard Adkerson

Thanks Mike.

Michael Gambardella – JPMorgan

I have one question. Can you explain the better performance in your gold volumes in the quarter versus your previous guidance?

Richard Adkerson

Mark, Mark Johnson is here. I'll let him answer that.

Mark Johnson

Mike, one of the opportunities that opened up to us in the first quarter is we had a relatively small mining area in the pit bottom in an area we call [six C's]. It has very high grades, and we were able to advance some of the volumes from that area in the first quarter and that's where we got our extra gold. The mill performed well, we had slightly better recovery, into the mill but we were on target in the other push backs and the [six C's] dairy opened up and we essentially are advancing goal volumes from 2009 by mining in that area.

Michael Gambardella - JPMorgan

Great, thanks a lot, Mark.

Richard Adkerson

Mike, if we go all the way back to 1998, over the past ten years, in the story of Grasberg, we developed long term mine plans and then operationally, when we have that opportunity to grab some high graded, and typically doesn't involve very much material. We can do that in a safe way, in a way that doesn't negatively impact our long term mine plans. We have done it and the history has been over that time that we produced significantly higher volumes than our plans at any point of time would have indicated our ability to do.

Michael Gambardella - JPMorgan

Okay. Thanks Richard.

Richard Adkerson

Okay, Mike.

Operator

(Operator Instructions). And next question comes from the line of John Hill of Citi.

John Hill - Citi

Good morning, and congrats also on a strong performance in the quarter. Just a quick question on sensitivities and in the presentation on the one hand the sensitivity is to changes in the metal's price, that metric doesn't look like it shifted very much, but the charts on page 22 and 29, essentially look like the cash flow performance is similar now. But we have raised underlying gold assumption from 800 to 900, molybdenum from 25 to 30, is the right way look at this and that many regards, cost escalation, has that offset the byproducts or is there more to the relationship?

Richard Adkerson

No, that's essentially, as you can see in the unit cost numbers, the site cost, its just obvious, higher sulphuric acid cost, higher diesel cost, labor cost increases, all of those things factor in. And the way you just described it is bi-products, which together represents maybe 20% of our revenues. The increase there is essentially funding the cost escalation that we are seeing for our total operations.

John Hill - Citi

All right got it. Then shifting gears a bit back to Grasberg, this is very exciting that they are finally undertaking the Grasberg block cave development this year. I was just wondering if we could get a little more detail on that? What are we looking for milestones, block characteristics and what are we learning down there?

Mark Johnson

John this is Mark Johnson. Really no surprises we are on track. We may have discussed it before, but we are developing the block cave from three different directions. We've got the common infrastructure; we've got some ventilation declines. And we got some drifts that we had available, associated with the [KAL] development. So from those three areas we are advancing all of those drifts. And in 2008 they will start to connect and allow the ventilation and drainage networks to be established. And in 2009 we'll start an earnest on developing underneath the Grasberg block cave and really no surprises.

Richard Adkerson

If you will turn to page 28, on your slides, you can see a schematic that shows what Mark was talking about, prior to our putting in what we are calling our common infrastructure drift we had in the 1990s, pushed and added from the mill at the 2,900 meter level the MLA, which dewatered the pit, but it also provided us the access for exploration drilling at the KAL Kucing oar body, the Grasberg Block Cave. And now this new tunnel system is 400 meters below that. We have been working on it for several years now. It connects the [DOZ] zone and associated ore bodies and the Block Cave of Grasberg KAL oar bodies to our mill. All of these numbers are capital costs that have been included in our numbers respectively. And there is a lot of information on this and our recently filed 10-K. Our underground team at Grasberg has just done an exceptional job. We have been block caving there since early 1980s, and both in terms of operations and expanding the DOZ mine that I mentioned earlier and now, with what we are facing here it gives us a lot of confidence for our future. We are projecting the pit to be essentially mined out in the 2015 range, but we will continue to reviewing that. And then we have this great ore body to develop underground, similar metallurgy and with the processing facilities and experience we have a lot of confidence about what we can do there.

John Hill - Citi

Great perspective. Thank you.

Richard Adkerson

Thanks John.

Operator

Your next question comes from the line of Oscar Cabrera of Goldman Sachs.

Oscar Cabrera - Goldman Sachs

Good Morning, everybody. Congratulations on the strong result. Just focusing on Tenke Fungurume. Increase in CapEx there, I think as you said Richard that this is happening across the industry, interested in hearing your perspective though on the increasing scope in the project, what are you expectations in terms of bringing that production higher from the levels that you are indicating here in the slides?

Richard Adkerson

Thanks Oscar. I am going to let John Marsden comment on that.

John Marsden

Yeah, Oscar, we are projecting this initial phase of construction. We are looking at a 115,000 tones per year of copper and between 8,000 and 11,000 tons per year of cobalt. And one of the things we have done in the last 12 months, just show that we have increased the mill throughput from 7,000 to 8,000 per day. And of course we've had increased volumes and other construction costs associated with that increase. So, to accomplish this first phase, we have been implementing a slightly bigger project than we had originally anticipated. But going forward we are including, we are putting in some infrastructure, other ancillary facilities to support a broader, bigger expansion of the Tenke district going forward. And we are still evaluating what those expansions or further expansions look like going forward. But we are obviously confident and optimistic that we are going to be able to add additional capacity going forward. So, just to summarize, with this project we are putting in additional facilities and beefing up some of the facilities that we had in the original plan to accommodate those potential future expansions.

Oscar Cabrera - Goldman Sachs

Very good, but what would your nameplate capacity be then with 8,000 tons per day, copper and cobalt?

Kathleen Quirk

Oscar its Kathleen, it's still 250 million pound a year of copper and 18 million pounds of cobalt, it is the initial project. But as John was saying we're planning to have additional reserves and plan to be able to expand the project. And so we're spending capital on the initial phase that will benefit us for the long term, but the initial phases of project is still 250 million pounds of copper

Richard Adkerson

But that's just beginning of the story of course Oscar. I mean we're doing three things. One, we're drilling more, the first objective is going to be to extend the potential life of this first project, then to quickly determine what an expansion would be from the oxide standpoint. After this stage, there is the mixed ore, sulfide ore, and other grades. The grades here are so high that looking at the processing rate it can be deceptive, particularly for us. You know that's accustomed to the mining operations at Grasberg. As we look down the road we can see some very substantial amounts of copper coming from a relatively low amount of material that's going through the mill. Stripping rates are miniscule here. You can have the opportunity to produce say 500 million pounds of copper from a facility that processes 32,000 tones per day. So, a lot of what you are seeing here from a capital standpoint is setting the stage for aggressive subsequent development opportunities, which we will be settling on, as we go forward with our drilling and processing analysis of how we deal with this.

Oscar Cabrera - Goldman Sachs

Thanks very much. If I may just a quick question; in terms of South America the power constrains are a big issue right now, we would be interested in hearing your perspective in terms of cash per ton on your South American or Chilean operations, and how you see that evolving, as we go through the winter months over there? Thanks.

Richard Adkerson

Okay, first of all, I'll let we Red talk about just overall power situation of our operations in Chile.

Red Conger

Yes, Oscar, in Chile, in the north it's a separate grid, not interconnected. We have lost natural gas from Argentina, the natural gas generators have converted to diesel conversion that all seems to be working very well, and we haven't had any supply problems. We have one generator there that is struggling with regulated customers that the mining industry has been working with, try and find a solution for them. We continue to work with them, so we see that as a good development going forward. In the central grid, we have been affected by drought, the reservoir levels are dropping, but we are optimistic that those are going to cover, based on experience in the past. We are optimistic that rain will come again and fill up the reservoirs next year. And we should okay on the central grid.

Richard Adkerson

Having said that, I mean, power is a huge issue there and the system is, as you all know Oscar, it is totally committed for the mining operations, and the other uses in Chile with its growing economy and its big agriculture operations. So, it is a real constraint on the future developmental projects there.

Oscar Cabrera - Goldman Sachs

Thanks very much for the perspective.

Operator

Your next question comes from the line of Victor Flores of HSBC.

Victor Flores - HSBC

Thanks very much. Good Morning. I wanted to ask you a few questions about the capital cost changes at Tenke, I am just trying to understand the numbers. In slide 14, you showed $235 million for infrastructure for the larger scale, you were just talking about. That implies a cost escalations, account for the other 615. But I think it's a bit more complicated than that and I was hoping you could elaborate a little bit more on the numbers on slide 14?

Richard Adkerson

Yes, John why don't you comment on that?

John Marsden

Yeah. If you look at the box, the insert on slide 14, you will see that the first bullet is cost escalation, $385 million and that's related to cost for equipment, materials, construction labor, supervision labor. For all of those we have seen dramatic increases over the last year or 18 months, and those are reflected and that's a pretty significant number there. If you look at the next line item, which is scope changes in higher quantities, I alluded earlier to an increase in the mill throughput and associated facilities at Tenke. And so, that has resulted in increased quantities of materials and equipment to achieve that slightly higher throughput rate. And also, we have expanded the tailings facility.

We have changed the size of some other facilities to beef them up for subsequent expansions. So, that is captured in the scope changes. The third category is enhanced infrastructure that was what Richard was talking about earlier. We provided some additional infrastructure. This will set us up well in the district going forward, and facilitate our future expansions of production capacity. So those three items between them account for the great majority of the changes. The other increases, there are some increases in duties and some other things that are captured in that other category. So that's really the high level breakdown of the increases.

Richard Adkerson

And Victor let me just say too, this also reflects and sometimes it's different just to drop it into buckets, but a more informed understanding of what it requires for us to set up the kind of operation we want to set up there. We redesigned the housing that people have. We are making additional investments in the health facilities and the health controls that are there, all of these things, the roads; we are working with other companies on projects to improve the road systems, the railroad system. Its very significant challenges, it's a tough place to do business, because of the infrastructure and location, getting equipment there, getting people there, and getting contractors to work on a reasonable basis. We put a lot of management, new management resources there, as we put people there, for other projects we are gaining a better understanding of what's required, and we are investing to do this thing in the right way, as I said, to build a platform for what the future will be there.

Victor Flores - HSBC

Alright, thanks Richard. If I can just ask one follow-up?

Richard Adkerson

Sure

Victor Flores - HSBC

What was the original budget for the tailings facility, and what is the new number, and what is the capacity of that facility?

John Marsden

What we've done is, we are putting in a facility that is going to initially accommodate a greater capacity, rather than having to rely on incrementally building up the tailings facility every year. We are giving ourselves a facility that's going to be a larger scale design, to avoid such additional construction of the dam on a annual basis. And so, it gives a small capacity upfront, which from a startup and commissioning point of view will be an advantage to the project. But essentially, the core scope of the tailings facility is pretty much similar.

Richard Adkerson

And it is not a big part of the element there, because this is not a huge processing, so in terms of the overall changes, it's really inconsequential.

Victor Flores - HSBC

Okay. Great. And can you give me a figure for what it is costing in total?

Richard Adkerson

For the tailings facility?

Mark Johnson

Let me get back to you on that.

Richard Adkerson

We would get back to you on that, we were flipping through our numbers here, it is not a huge part of the total project and we just don't have that available. We will get back to you Victor.

Victor Flores - HSBC

That's fine. It was more out of curiosity than anything more than that. Thank you so much.

Richard Adkerson

All right. Thank you for you your questions.

Operator

The next question comes from the line of Brian Macarthur of UBS.

Brian Macarthur - UBS

Good Morning. I just wanted to go back to Tenke for a minute please, and can you just remind me how the funding works. I know its 70% Freeport and 30% Lundin, but I thought there were some levels which you carried them. And obviously with a larger capital cost overrun, and you end up happen to give them quality loans or how is this all going to work out?

Richard Adkerson

It is not a carrying, but under the deal that was negotiated a number of years ago, with Lundin, who had the original contract for the concession going to back to 1996, we have an obligation to fund through a loan mechanism, certain cost overruns. And it's basically overruns for a 125% of the original project definition, and our project scope, which means we finance that and provide funds part, those amounts are repaid to us out of future production with interest.

Brian Macarthur - UBS

Right. So the 125% is based what on the original $650 million, or the $500 million?

Richard Adkerson

It was based on the original project definition.

Kathleen Quirk

The regional feasibility.

Richard Adkerson

The regional feasibility study.

Brian Macarthur - UBS

So, it's not a carry, but that 125% stuff, let's take the very easy math say its $500 million. Once you get the $625 million due then lain everything after $625 million, and it's still 70% - 30% on that, first 25% or how does that part work?

Richard Adkerson

70% - 30% on the initial project, and then to the extent they are overruns, as defined by the contract, at a 125% of that, we provide the funds part and then that's repaid out of Lundin's future production. It's a similar situation to the financing mechanism, that both partners have for the Gecamines interest, where Gecamines doesn't put up capital, the two partners fund that and that get's paid out of Gecamines interest in the project from the future.

Brian Macarthur - UBS

Okay. Great thank you.

Richard Adkerson

That was part of the original deal that was negotiated to bring partners into this.

Brian Macarthur - UBS

Right. But the Gecamines stuff and all that's on the table for the current negotiation with the government?

Richard Adkerson

Well, one of the issues that government raised was Gecamines interest in this.

Brian Macarthur - UBS

Right.

Richard Adkerson

This project, so that is, as you say, on the table for discussion.

Brian Macarthur - UBS

Okay. So this whole thing still has to be worked out a little bit going forward if I put it that way?

Richard Adkerson

As we said we're working with the government. We are of a strong view that the overall participation of the government in the contract and this is a contract that was renegotiated. We've already gone through a renegotiation.

Brian Macarthur - UBS

Right.

Richard Adkerson

The original contract in 1996 over a multi month transparent process, a new contract was renegotiated. It provides for Gecamines interest, taxes, royalties in signed in 2005, on world standards it is a very fair contract from the perspective of the government. And our position is that we have a contract that's mutually fair and one that provides us the basis for going forward and gives the government a fair participation in the project and that's what we are talking with the government about now.

Brian Macarthur - UBS

Okay. Thank you. Switching to something totally different, would you just conceptually talk a little bit about the comment on Cerro Verde on page 12, where engineering in-progress, capital cost maybe higher than the initial estimates, that’s like happening in the industry, as you mentioned, but what exactly conceptually are we talking about here at Cerro Verde. Will we go all through that as far size of expansion or can you give me any details on that?

Richard Adkerson

There's two things that is talked about here. One, this is more of a fine tuning of the most recent expansion and the ability to de-bottleneck, to come into play. And it's really a small number. And the cost escalation we're talking about that is steel, and energy and labor. I mean it's those sorts of things. It's really not anything significant. The bigger opportunity there is to have a major expansion. Indications are that the ore body there would support that and that's what we are really putting our focus on, in terms of looking at the environmental issues, water and power issues to expand there, because we think that that ore body is going to give us an opportunity to do that and in the context of today's copper world in a straight forward way.

Brian Macarthur - UBS

And just if I can do one other final question just a totally different part of the road. Just I know about this before, but as we gone through the common infrastructure and think that now, you've got pretty well over the Grasberg underground now, you were tunneling through that whole undrilled area. Can you give us any update on exploration there?

Richard Adkerson

We are drilling there as we talked about and what we call the gap looking at the area between the Grasberg block cave in Kucing Liar and the DOZ. Our drilling is progress, we are very encouraged by. There have been some positive indications of mineralizations as we expected to see there. You can see that again referring back to the chart on page 28. The driving of the common infrastructure add has given us access to that. We are seeing mineralization and we will continue to be testing that as the opportunity of significantly increasing the underground resources at the Deep MLZ and associated ore bodies and drilling has been positive, Brian.

Brian Macarthur - UBS

Great. Thank you very much, Richard.

Richard Adkerson

Alright, thanks for your questions.

Operator

Your next question comes from the line of John Redstone of Desjardins Securities.

John Redstone - Desjardins Securities

On the side of the capital expenditure that you have for 10-K $1.75 billion, that does include the $475 million you've already spent in the project.

Richard Adkerson

It certainly does.

John Redstone - Desjardins Securities

Okay, excellent. Now moving on to something completely different. On your molybdenum operations. I am wondering if you can give us a little bit more detail about the proposed startup and scope of Climax. For example, given that every ounce seems to count in the molybdenum market these days. I was wondering how much of the 18 million pounds you're forecast in sales for next year is actually going to come from your Climax operations?

Richard Adkerson

9

John Redstone - Desjardins Securities

9

Richard Adkerson

Climax is schedule to start in 2010. So all of our production for next year will come from, our Henderson mine, as well as by-product production from our mines in the US and from the Cerro Verde mine in Peru. Climax we feel confident about our ability to bring it on within the timeframe, Dave Thornton is here. We're also optimistic about adding reserves. If we look out and you point out, you point very well John the value of these molybdenum pounds in today's world. And we're looking for additional molybdenum resources from our by-product operations at our copper mines. We're looking for resource in Grasberg. And so it's really an important part of our business.

John Redstone - Desjardins Securities

Although you have your production from our molybdenum operations this year is flat to trailing off through '08, you're going to get it up by 10 million pounds next year. All right?

Richard Adkerson

That's correct and that's principally Cerro Verde, where we added a molybdenum circuit in our expansion. It's being ramped up and we expect it to be on stream at its capacity level for 2009.

John Redstone - Desjardins Securities

Excellent, thank you very much indeed.

Operator

And your next question comes from the line of Mark Liinamaa of Morgan Stanley.

Mark Liinamaa - Morgan Stanley

Good Morning. On the demand side, I was wondering if you could comment on any implications of high prices that you're seeing if any. And the second one, if you could just comment on the sulfuric acid situation, I don't think it has any effect yield but any implications of that on supply? Thanks.

Richard Adkerson

Yeah, Mr. Liinamaa, let's see implications of high prices, the implications for us are great. I mean, its great margins, great cash flows, allows us to invest, my guess is you're talking about markets and higher prices, the way that markets work is prices used to allocate scarce commodities to their highest uses and that's happening. So we see plumbing uses of copper and plumbing in the US dropping, but uses of copper in energy saving devices around the world and mechanization of process is everywhere in higher use applications. The world is getting increasingly, developing things that need copper and so worldwide copper demand and usage is very strong. Just incredible growth in China, and increasing growth in India and around the world, we feel great about the market. But as prices remain high, copper will be allocated away from its lower value uses to its higher value uses.

Mark Liinamaa - Morgan Stanley

Very good and on the sulfur?

Richard Adkerson

We're affected by acid by the way, I mean, we have substantial SX/EW operations and expanding operations and so we have and Tenke Fungurume is a leech operation so this remarkably higher asset cost are affecting our cost. We are planning on how to deal with it. For example right now we are buying assets for Safford, but we are in the process of constructing a sulfur burning facility there, to generate asset to ourselves. We have a facility, we will be constructing at Tenke and we are doing some long-term planning about how to deal with asset in South America, North America and at Tenke. So it is an important business issue for us and we are working on everyday. We use asset at El Abra and Cerro Verde and we will for the future.

Mark Liinamaa - Morgan Stanley

And quickly, back to Africa, significant amount of gold over the next three years, supposed to come from projects there. We are seeing a lot of issues arising about how to divide returns between providers of capital and the host countries. Can you comment on the delays industry wide that we might see as this stuff works its way though the system? And I am done after that. Thanks

Richard Adkerson

Well, you have to look to the other companies to talk about their situation because we are not in a position really to talk about specific operations. But you look at what we are dealing with, and the quality of projects that we have, and you translate that to other projects. Its not just Africa, but Africa clearly faces issues, financing projects for some companies around the world is very tough today and all of these cost elements affect everybody. But globally around the world, particularly for major underground developments and greenfield projects, this cost situation is really, everyone in the industry is having their eyes pop out at it. And it's something that's developing in recent months. We are fortunate that we've got such robust projects, we can absorb it and we've got good markets. But it is certainly a factor in terms of looking at future supply situation for the industry as a whole.

And Mark, Kathleen passed a note just on the asset situation to note that we produce a significant amount of asset at our Miami smelter and at our smelter at Atlantic Copper. So, in the past we have been relatively balanced in Southwest US, but as we are expanding we will have needs to get outside sources of sulfur and we are looking what we might could do at Miami, but we are a significant asset producer.

Operator

Your next question comes from the line of Daniel McConvey of [Rockford Investments].

Daniel McConvey - Rockford Investments

Congrats again on delivering in tough times. You answer to Oscar and Mark's question you actually got to what I had. They are good answers. But I am just wondering in terms of consumables of any kind, whether its sulfur or power et cetera right now for your operations. Given the stress in the world right now are you finding in any other consumables this difficulty in getting access to consumables including diesel?

Richard Adkerson

Well, you can get access to diesel, I mean, that’s not an issue. It is just the cost of it. But diesel has caused the nature of all markets, it's available. But beyond the ones you have mentioned, I mean, there are huge issues today with all elements of equipment and supplies to the mining industry. Long lead times for major equipment, purchases for mills, for trucks, for shovels, component parts are an issue tires, which everyone has talked about for several years continue to be very tight. We have programs, Red teams worked on to extend the life of tires and use different approaches.

So it goes, and I don’t think it is overstating it to every element of our business. Contractors today, they are stretched and trying to get the right contractors whether it's for our underground development operations or for construction management is an issue. And if you ask the guy sitting around the table what our biggest issue is, its people. And we're taking steps to aggressively add to our internal management team and develop workers at all levels, but this is an industry of where years of underinvestment, slow times, conservatively managed companies are catching up with us. We have these great opportunities now and the resources are very scarce.

Daniel McConvey - Rockford Investments

Thanks Richard.

Operator

Your next question comes from the line of [John Tumazos], Private Investor.

John Tumazos - Private Investor

Hello, John Tumazos, good morning. Your 11 incremental expansion projects that you described seem very, very powerful and improving your existing permitted assets and $180 million in exploration for 80 or so rigs running. Is it too strong to infer from that, that the 200% of your team's time is being spent on the projects in hand and that acquisitions of big companies or acquisitions of little companies like the Teck bought something for $400 million last week. You are not really, probably having the time for things like that, given that you have such wonderful opportunities at your existing operations. Just tell me if I am reading too much in your actions?

Richard Adkerson

No, John, I had used a couple of different words, but your point is exactly right. Our teams really focus is, I mentioned at the outset on our internal investment opportunities. We stay in touch with what goes on in the world. We're able to do that through the steady line of investment bankers who come in and talk to us about what's going on in the world. But in terms of our people, operating guys seeing around this table, our focus is really on our operations. One, we want to produce as much copper out of our operations as we can, much molybdenum much gold with the prices that we have and then the chance to have this great company we've put together with assets and the team and the people to invest. So, you are exactly right.

John Tumazos - Private Investor

Now historically, both Freeport and PD were very conservative operationally and financially. And the slide you showed for reserves at 120 copper, incremental 150 copper is based on the data before as 80 rigs drilled for the year and 180 million of outlay. Would it be too strong to characterize the 11 projects incremental? This is tip of the iceberg and then a lot more is going to come out of the work you are doing?

Richard Adkerson

We really think so, and we are putting together Freeport and Phelps Dodge, we can be more aggressive. I mean, the company is much strong together, the strategic rational of matching up Grasberg with the almost upside set of assets allowed us to have a company that can be more aggressive and from day one started with due diligence. But from day one March 19th to year ago we are aggressively looking for opportunities to invest. And as we do that, we are more encouraged as time goes by.

The challenges with our greenfield projects that are significant. You see those reflected and what we're seeing about Tenke Fungurume, which has this incredible mineralization. There are challenges, but they are much less significant for brownfield expansions, they are much less significant. And so what we have is ore bodies that haven't been understood even though they've been mined for a 100 years. And as we gain understanding, as we look for opportunities there to have these markets is much more straightforward to expand the Morenci than it would be to develop a new project anywhere in the world.

Jim Bob Moffett

Richard this is Jim Bob, let me just emphasize to John what we said several time. The brownfield opportunities that we have to bolt-on reserves to existing mines, we already have infrastructure. And it's not only that opportunity, but where we find the new core holes, the kind of opportunities that we see in terms of grade and volume. Bravo any greenfield opportunity we might have. So the ore we're bolting on is not low grade, in many cases its just ore that has been left undefined. And therefore, we are having greenfield type hits on brownfield exploitations. It’s the best of our world.

Richard Adkerson

Absolutely, and I'll just come back to Cerro Verde, where we do have some issues to deal with but we have the potential opportunity just to completely replicate twin what we have there and take an operation that produces 600 million, 700 million pounds of copper a year and overtime have the chance to double it.

John Tumazos - Private Investor

Rich, is that air permit at Climax the last permit and is everything now completely in place for thirty or another 30, 60 million pounds?

Richard Adkerson

Dave Thornton's here. Dave?

Dave Thornton

Yeah, John, that's the last big permit we needed for Phase I, if we are going to double the facility. We would have to apply for another permit.

Richard Adkerson

There's some accounting type things you have to do like building your house but in terms of major permits, we're done.

Dave Thornton

We're done.

Richard Adkerson

For the first project.

John Tumazos - Private Investor

Which month is your target production in 2010?

Dave Thornton

We're still early on in the engineering. We just got about 20% of our detailed engineering completed today. So we're still looking at that John. It's too early to actually say when in 2010.

Richard Adkerson

Yeah, it's this mine, for those of you who don't know. I know John knows he is sitting right on top of the continental divide of, 11,000 feet and so we have to construct during the summer and but we're very confident about our ability to basically complete construction, 2008, 2009 building season and startup in 2010.

John Tumazos - Private Investor

Thanks and good luck.

Richard Adkerson

All right.

Operator

Your next question comes from the line of David Cohen of JPMorgan.

David Cohen - JPMorgan

You guys have mentioned opportunistic debt reductions. We know that you purchased little more than $30 million of 9.5% senior notes in February, 2008. Rich just hoping that you could possibly put some more color behind the debt reductions. Are you looking at opportunities based on coupon payment maturity, current trading levels or is it some other metric?

Kathleen Quirk

David, this is Kathleen. In terms of policy, we are really focused as Richard mentioned on our internal investments, and then beyond that returning cash to shareholders. We've essentially met our debt reduction targets and at this point what we are really looking at in terms of debt buybacks is just, as opportunities come to us, we look at the economics of those, we have a dislocation in the market or some opportunity to do it. We will do it but it's not something that we are out actively looking to do. It's just if things come to us that are very attractive from an economic standpoint, we'll take steps to do that. We are also interested in taking steps to further simplify our balance sheet and clean up some of the securities that are out there, to the extent we have opportunity to do that we will look to do that, but only on a real attractive economic basis.

Richard Adkerson

It's just a PV analysis and we have some call dates coming up in the future that will have the chance to deal with our debt.

David Cohen - JPMorgan

Okay. Thank you very much.

Operator

Your next question comes from the line of Brett Levy of Jefferies.

Brett Levy - Jefferies

Hey. Similar question to what David asked. As you guys kind of look at what you are going to do with capital. I am guessing that Moody's is at some stage and may be give me a sense, what Moody's is thinking with respect to you guys in investment grade. And then also just talk a little bit about whether or not you guys are planning to stay investment grade and a little bit about kind of your state of inquisitiveness are you looking at anything that might be a re-leveraging acquisition here or anything else along those lines?

Richard Adkerson

Brett, Moody's will reach its own conclusions. You can read what they say about us and the issues that they take into account with their ratings. With respect to all the agencies, we communicate with them and we've had a clear cut situation. We are very comfortable with our ability to run our business as a non-investment grade rated company. We always felt that with the strength of our assets in the markets, our balance sheet would improve to the point of where the agencies would conclude. We should be investment grade and that's happened with two of them now and we believe overtime Moody's will reach somewhat of a conclusion.

We have sufficient cash to fund our investment plans for growing our business and so we don’t anticipate levering up the company to do that. Our strategy is not to grow through acquisitions. If there was a opportunity that to came to us and made lot of sense for our shareholder, we are in position to consider it. But our strategy is to go through investments and our cash flows will fund those investments.

Brett Levy - Jefferies

Thanks very much guys.

Richard Adkerson

Okay.

Operator

The next question comes from the line of Sanil Daptardar of Centennial Asset Management.

Richard Adkerson

Sanil, maybe, he has dropped off. Operator, let’s go to next question.

Richard Adkerson

Hello.

Sanil Daptardar - Centennial Asset Management

Hello.

Richard Adkerson

Hello.

Operator

Sanil, you r line is open.

Richard Adkerson

Sanil if you can’t, we can't hear you. If you can’t get through, contact us after the conference call and we will respond to your question. So, let’s go forward.

Operator

Your next question comes from the line of Lawrence Jollen of Lehman Brothers. Hello, Lawrence.

Lawrence Jollen - Lehman Brothers

My question has been answered, thank you.

Richard Adkerson

Okay, thanks Lawrence.

Operator

Your next question comes from the line of [Edward Okine of Wessler Capital]. Edward?

Edward Okine - Wessler Capital

Do you hear me. Hello

Richard Adkerson

Yes. Good morning.

Edward Okine - Wessler Capital

Okay. Good morning. My question was with regard to cobalt and I was just wondering on what your marketing plans for that product would be? I mean The big guys are roaming in Africa trying to order cobalt there is in the DLZ. So I just try to find out, if we are going to use the same party to market it or you would set up your own marketing which for …

Richard Adkerson

Well, we have a marketing group. We don't have to set one up. We are in the market in a significant way with copper and molybdenum and copper concentrates. And our marketing group is actively working in the marketplace to find the placement of cobalt is a very small market, but it's in great demand right now. And so we are, we are taking steps in the marketplace to find a home for the significant amount of cobalt we'll be producing in the future.

Edward Okine - Wessler Capital

Okay. And the other question that I have is with regard to the loan, just know which is what I believe is getting this loan for the power infrastructure development. Is the loan going to be guaranteed by the government or is it going to be secured by the assets and how do you get paid for the loan? Is it through revenue basis? I mean just share some more information on how this loan is going to work?

Kathleen Quirk

Yes. Edward's its Kathleen. We are advancing roughly $140 million to the state owned power entity there to refurbish the facilities for our power. We will be repaid that loan through our power purchases. It's not to answer your question about guarantees, its guaranteed or secured; it’s a situation where we will be repaid overtime as we consume power at the operations.

Richard Adkerson

And other use is because, we have to make this investment [or personnel] and establishing reliable power once we have that, we will have a very attractive power source and attractive cost for our operations in the context of worldwide power requirements.

Edward Okine - Wessler Capital

Thank you.

Richard Adkerson

Thank you.

Kathleen Quirk

One other follow-up to Victor's question earlier about Tenke and the tailings dam. The capital cost included in our estimate is just under 5% of the total project. It's about $80 million of the $1.75 billion.

Richard Adkerson

Okay. Operator, any more questions?

Operator

At this time, there are no further questions, sir.

Richard Adkerson

All right, anyone has follow-ups, we are always available. We appreciate your interest in our company and as you can tell we are awfully excited about what we have in front of us.

Jim Bob Moffett

Richard, let me just add one comment about our exploration. We said to John Tumazos that we have greenfield type opportunities and at brownfield exploitation program. And what we may mean to do is in light of the new price syndrome that we see there is a tremendous opportunity by just using our prices for our cut off grade. Let me emphasize that, as we do that we are not seeing just the lower grade portions of the ore body on the parameter of these ore bodies. We are seeing deeper hits that are greenfield type of opportunities, and gives us an opportunity to bolt-on significant reserves at almost all of our operations.

I hate to use the word limitless opportunity, but the size of these ore bodies like Morenci, like Cerro Verde, like El Abra. You see the ore that’s being bolted on. It's like discovering a new greenfield property, in the same vicinity, where all of our infrastructure exists. Before, a lot of people wondered on many occasions, well, why are those opportunities there? We just have to remember, and I know everybody is aware of the fact that we are in a new era of pricing. Well with these $3 and $4 copper prices, the incentive for us to spend the money, to define the outer limits of these reserves is just.

So compelling compared to what it was in the days of $0.80 copper and $1 copper and with this $180 million of exploration that you see in our budget, those are all greenfields projects. You spend so much money on greenfield projects, just getting the logistics set up, and then in many cases if you spend $50 million, or half of it on greenfield projects, it's just getting the logistical parts set up and getting started. In our case, in the $180 million, and so much of our budget is focused on bolting on these vast amounts of reserves by using a different outlooks on price cut off and grade cut off. It's amazing how much money of a percentage of our $180 million, almost every nickel as it goes into core hole, that's a huge difference, then its $180 million as I say, was all going into this project.

So the money we're spending is not only money that's bolting on reserves but the efficiency of the amount of money we're spending compared to going into a typical greenfield project is just overwhelming. So we will be reporting on those results as we get more definitions where we're adding to the base and the side of these amazing ore bodies that we already have the opportunity to own.

The resources, that we're going to be proving up for the shareholders is going to be one of the greatest opportunities we could have had and is a huge plus for this acquisition and a combination of these two companies. Thank you, Richard.

Richard Adkerson

Bob, thanks. Thanks everybody for your interest.

Operator

Thank you everyone for joining us today. This concludes our call. You may now disconnect.

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Source: Freeport-McMoRan Copper & Gold Inc. Q1 2008 Earnings Call Transcript
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