Freeport-McMoRan Inc. (NYSE:FCX) Q1 2023 Earnings Call Transcript

Freeport-McMoRan Inc. (NYSE:FCX) Q1 2023 Earnings Call Transcript April 21, 2023

Freeport-McMoRan Inc. beats earnings expectations. Reported EPS is $0.52, expectations were $0.45.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the conference over to Ms. Kathleen Quirk, President. Please go ahead, ma’am.

Kathleen Quirk: Thank you, Regina, and good morning. Welcome to the Freeport-McMoRan conference call. Earlier this morning, we reported our first quarter 2023 operating and financial results and a copy of today’s press release and slides are available on our website at fcx.com. Our conference call today is being broadcast live on the internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today. Before we begin our comments, we’d like to remind everyone that today’s press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially.

Like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings. Also on the call today is Richard Adkerson, Chairman of the Board and Chief Executive Officer; Maree Robertson, our CFO; Mark Johnson, our Chief Operating Officer for Indonesia; Josh Olmsted, Chief Operating Officer for the Americas; Mike Kendrick, who leads our Molybdenum Business; Cory Stevens, who leads our Engineering and our Project Development Activities. I’ll turn the call over to Richard who will make some opening comments and then we’ll come back and review the prepared slide materials and then take your questions. Richard?

Richard Adkerson: Thank you, Kathleen, and thank you all for joining us. Kathleen will review the results of the quarter and our outlook and I’ll join our team in responding to your questions. I’m pleased with our global team’s responses to challenges we faced in the first quarter. You all know, mining is a tough business, that’s evidenced by the recent reports throughout the industry. Who you are in our industry is defined by your responses to challenges. I’m very proud of who we are at Freeport. Our team in Indonesia, once again, proved resilient in overcoming a major flood event. Now, we’re accustomed to dealing with rainfall at Grasberg. It’s located high in the mountains of New Guinea, one of the wettest places on the globe.

We just celebrated our 56th anniversary of operating there. Our systems are designed to handle significant rainfall. The intensity of the event we experienced in January was unusually severe. Our established systems prevented major damages. Our team bounced back quickly by taking immediate actions to restore production and mitigate future risk and we have a great start in the second quarter with operations there. Kathleen and I have made a series of trips to Indonesia in recent months. For me, it’s personally gratifying to experience the markedly more positive attitudes there about Freeport than in years past. All this resulted from the partnership we established with the government in 2018, the success we have achieved in the multi-year large scale development of our underground operations, and the positive outlook for copper in the future.

Grasberg has now returned to rank as the world’s second largest copper mine. Our net cash cost of production at Grasberg in the first quarter was a negative $0.08 per pound. We’re now working positively with the government to extend PT-FI’s operating rights beyond 2041 in a way that benefits all stakeholders. At Cerro Verde, our team negotiated through a volatile period of political turmoil in Peru. Our team rallied around the community and our workforce to handle the situation in a remarkable fashion. Our US team is stepping up to overcome the challenges associated with labor availability in the United States. We appreciate the commitment and drive of the global Freeport team to reach our gold in challenging circumstances. Copper markets continue to be supported by low levels of inventories, China’s accelerating economic recovery, and the ongoing positive global demand drivers for copper.

Our customers continue to buy all the copper we can produce and seek more. As we move forward, copper miners will be required to expand production to meet demand. At Freeport, we’re in a strong position to develop new sources of copper supply to grow our business from our vast brownfield resources and also to grow our business from the rapidly developing leach technology and the supporting data analytics. At Freeport, we benefit from strong franchises and support from communities where we operate. We are committed to maintaining a strong balance sheet. We have an exemplary track record for success and project and operations execution. Focused execution is the backbone of our culture at Freeport. We have a clearly defined strategy and a relentless drive for achieving long-term success.

And Kathleen will now review our slides.

Kathleen Quirk: Thank you, Richard, and I’ll start on slide three. You’ve probably seen, we published our Annual Report and our Sustainability Report today and the reports are available on our website. The theme of this year’s Annual Report is The Power of Copper. It highlights the critical role that Freeport and our principal product, copper, play in powering the global economy and the growing uses of copper as the world decarbonize and re-imagines modern infrastructure to support a highly connected world. We’re also proud to publish our annual Sustainability Report. We’ve been reporting on our comprehensive sustainability initiatives for 22 years now and transparency continues to be enhanced. The report summarizes our initiatives, our achievements, and the challenges that we face in managing the safety, social, and environmental aspects of our business, which are critical to our long-term success.

We use international standards, best practices, and third-parties, such as The Copper Mark, to measure our performance and responsibility to our stakeholders. We hope you’ll have the chance to review this information and engage with us on these topics. We’ll turn to slide four, which summarizes our key operating and financial highlights in the first quarter. As previously disclosed, our Grasberg operations were temporarily disrupted in February, following a significant weather impact in our mill area. As Richard said, the team did a great job to safely restore production to normal levels in March. Despite the lower volumes compared with our estimates going into the quarter, our consolidated unit net cash costs were essentially in line with our guidance.

Consolidated cost per unit averaged $1.76 per pound in the quarter as higher byproduct credits more than offset the volume impact. As Richard mentioned, notably, even with the disruption, Grasberg unit net cash costs averaged a net credit of $0.08 per pound, meaning, the gold revenues more than offset the cash costs of production. With the return to normal operations in March and a great start in April, we expect our volumes to be strong in the balance of the year. Our margins in the quarter were strong, our EBITDA totaled $2.2 billion in the quarter, operating cash flows, which were net of $500 million use of cash for working capital totaled $1.1 billion. We funded investments during the quarter of $1.1 billion. That included about $400 million for major mining projects and $300 million for the Indonesian smelter, which is being funded from proceeds from financing we raised last year.

Excluding net debt associated with the smelter, we ended the quarter with $1.3 billion in net debt. Our balance sheet, liquidity, financial flexibility are in terrific shape. The outlook is positive for free cash flow generation in the balance of the year. The next slide, Richard talked about the challenges we faced in the first quarter and we faced these across our global operations. Our teams executed well in the circumstances. And you can see on the left, the production impact of the weather event at Grasberg in February and the strong recovery in March. In Peru, we and other companies experienced a challenging environment earlier in the year associated with widespread protests, which impacted supply chains and transportation routes. Our team at Cerro Verde did a great job managing the situation efficiently and safely.

Situation in Peru has improved in recent weeks and we’re now operating at normal rates. In the US, we were challenged with ongoing labor shortages, extreme weather events earlier in the quarter and unplanned maintenance issues. We’re working to improve productivity and reliability, working on skills development and pursuing technology and automation initiatives as we aggressively seek to recruit workers with ongoing tight labor market conditions in the US. The leach recovery efforts, which we’ll talk more about, really helped to offset some of the shortfalls in mining rates and we’re going to continue to build on this. Turning to the markets on slide six. Freeport is well positioned as a leader in the global copper industry. Demand for copper is expected to accelerate going forward with projections for demand to double by 2035.

Copper is essential in electrification. Low carbon investments in renewable power and electrification are driving massive growth in demand. In addition, the initiatives by many countries from major infrastructure programs and the uses of copper for connectivity, data, and artificial intelligence are also growing demand drivers. At the same time, the ability of the industry to meet this rising demand is a real challenge. All of us can look back at this time last year when many were projecting the market to move to a surplus in 2023, pointing to the new projects that were coming online. As we look at the situation today, most analysts now project the market to be balanced this year even with the new projects, and longer-term, the projections are for very large deficits.

Under this backdrop, we believe prices will need to rise to incentivize new supplies. And at Freeport, we benefit from a large reserve position, as you see on the slide, and an even larger resource position to grow our business in the future. We’re strongly positioned to continue to support growing demand and are pursuing several of these initiatives to enhance production going forward. On slide seven, we talk about the molybdenum markets, and as we’ve discussed, in addition to being a leading copper producer, Freeport is the world’s largest molybdenum producer. Last quarter, we spoke about the significant rise in molybdenum from $18 per pound in late 2022 to a high of over $38 per pound in the first quarter of this year. We realized $30 per pound for our molybdenum sales in the first quarter.

The price rose sharply beginning in late 2022 in response of supply issues and favorable demand drivers in energy and aerospace sectors. The prices began to drop from the highs in recent weeks, partly related to improved supply. As we look forward, the demand drivers from moly are positive, and since moly is principally produced as a byproduct from copper mines, it’s also subject to some of the same supply issues as we have in copper. Current price of moly approximates just over $21 per pound. We’re really excited, moving to slide eight, really excited to talk today to give you an update on our leach initiatives, which Richard referred to earlier. Our efforts to increase copper production through enhanced recoveries from our massive leach stockpiles is continuing to gain momentum.

Based on our results today, we’re gaining increasing confidence in achieving our initial target of 200 million pounds per annum and have begun to model what the next phase could look like. On the left side of the chart, we summarize the various categories that make up the initial 200 million pound target, basically in three buckets. The first is, relates to heat, increasing temperatures within the stockpiles. The second is an initiative we call Leach Everywhere, which is focused on making sure the entire stockpile has the benefit of the liquid solution we use to leach copper. And the third category, which is really important, it involves data analytics using new data available through sensors used in a variety of ways, including optimizing the amount of solution use and the rate of application we use to achieve the best results.

It’s been proven that increasing heat in the stockpiles enhances recoveries. We’ve advanced the installation of covers on our stockpiles for heat retention and we’ve mechanized the process and that’s allowed us to execute more efficiently. We now have over 30% of our massive stockpiles covered. These initiatives provide 30% of the targeted increase. The Leach Everywhere initiative makes up 50% of the uplift and uses targeted drilling to improve flow of the solution that may not be getting through the stockpile. We’re also drilling injection wells to add the liquid solution to lower stockpile sections. The sensors we’ve installed and access to other technology used in oil and gas formations are providing new information on where additional leach solution would stimulate the process and support higher production.

The data analytics works is providing new insights. We really haven’t had the benefit of this in the past, and we’re now able to get the benefit to determine the optimal operating protocols under various conditions of the stockpiles. The initial success of these initiatives adds production at low incremental cost and a low carbon footprint. In parallel with our initial activities, we’ve been doing substantial work on the drivers to stimulate leach production and have modeled results on what the next phase of initiatives could yield. We see an opportunity to add an additional 600 million pounds per annum from these initiatives, which would provide a total of 800 million pounds per year. That’s the size of a major new mine without the capital intensity and a very low incremental operating cost.

The three areas of focus are highlighted in the center of the slide and we’re in various stages of development on each of these initiatives. We’ve got a lot of work to do to advance these initiatives and some of this requires further innovation, but we have a clear path to success in this program. We’re evaluating opportunities to increase the temperature further by heating the liquid solution before application on the stockpile. We’re evaluating options to do this using solar generated power, geothermal or other renewable sources at our mine sites to accomplish the additional heat requirement. We’re also testing various additives that we’re developing both internally as well as from third-party initiatives. And we’re using artificial intelligence in our journey and in our evaluations to help expedite the process.

We’re also evaluating options to inject air into the stockpiles in areas that are not getting enough oxygen. Again, we have much more knowledge of what is going on within the stockpiles and are working to design solutions to restimulate copper production. Freeport is in an exceptionally strong position to lead the industry in this area with massive stockpiles currently under leach, ongoing mine leach, mine for leach activities and the latent tank house capacity that we have. This will be part of our growth plans as we go forward in addition to the organic growth that we have to develop new copper in traditional ways. And slide nine highlights the growth and development outlook. And as we look at growing copper demand and the limitations and risks and actionable greenfield project development, our strategy and development priorities are focused on extensions of our existing operations and our portfolio of brownfield opportunities.

On slide nine, we show our near-term, medium-term and longer-term development options. Following the significant growth in recent years achieved through the successful Grasberg development, we’re focused on advancing to next phases. In the near-term, we see the best options for growth and achieving our initial leach targets and actions to enhance productivity and reliability in our US operations. If we can get our mining rates up in the US, which we’re working on, and hit our targets for asset efficiency and reliability, we have the opportunity to add an additional 200 million pounds per year with limited capital investment. In the medium-term, we’ve outlined a series of initiatives. The first includes the second phase of our leach project.

We’re also looking to expand our Bagdad mine in Arizona and expect to complete feasibility studies this year. We have a major opportunity in Chile at our El Abra project and we already have an existing operation and looking to expand it significantly. And we’re in the process of developing a new 90,000 ton per day block cave mine in Indonesia called Kucing Liar, which is currently in progress and expected to commence initial production by the end of the decade. At Bagdad, we’re making some investments, which are included in our new capital expenditure guidance to conduct early works in the tailings area to enhance optionality to move more quickly with the mill expansion project, following completion of the feasibility study. Longer-term and we’re already working on these projects, as they require long lead times, we expect we’ll have the opportunity for further major expansion in the Safford/Lone Star district where we have identified significant resource and we have a series of US brownfield projects that can be pursued.

In Indonesia, Richard talked about the extension discussions we’re having and the extension of our operating rights beyond 2041 would open the door for continuation of large scale mining and potential additional development options in one of the world’s largest and highest grade copper and gold mining districts. We’re in an outstanding position to continue our leadership role in supplying copper to a world with growing requirements. We’re going to continue to be disciplined in our approach and focused on executing projects where we can create value for shareholders. On slide 10, we provide an update of our three-year outlook for sales volumes. We’ve updated the 2023 sales guidance to take into account the first quarter disruption and the impact of lower mining rates in the US.

Despite the disruption at Grasberg in February, our gold volumes for 2023 are about 3% higher than prior estimates. We’ve incorporated the estimates for stronger gold recoveries than in our January forecast, and we’re doing really well in that regard. The guidance for 2024 and 2025 is unchanged. But with continued success in our leach efforts, we have some upside to these estimates. On slide 11, we show, moving to cost, we show a comparison of our prior unit net cash cost guidance for 2023 compared to our current estimate. We currently estimate unit cash cost to average $1.55 per pound for 2023, that’s slightly lower than our January estimate of $1.60 per pound. The impact of the lower — copper volumes is offset by higher byproduct credits and a reduction in export duties in Indonesia associated with our smelter construction progress.

Our assumptions for the key commodity based input costs are similar to the January estimates. We’re starting to experience less inflationary pressures in certain areas than in 2022, particularly for energy, while labor cost, services and equipment components have increased. In the reference slides on page 23, you’ll note an approximate 7% increase in site production and delivery costs for our US mines compared with prior estimates. This largely reflects a reduction in volumes in the US associated with the challenges we discussed earlier. And we’ve got ongoing initiatives to improve productivity there. Moving to our cash flows. On slide 12, we show modeled results for EBITDA and cash flow at various copper prices ranging from $4 per pound of copper to $5 per pound of copper.

These are modeled results for 2024 and 2025 with our current volume estimates and our cost estimates and we hold gold flat at $2,000 and molybdenum flat at $18 per pound in these models. Our annual EBITDA under these scenarios would range from over $10.5 billion per annum at $4 copper to $15 billion per annum at $5 copper. And operating cash flows would range from $7.5 billion per year at $4 copper to $11 billion per year at $5 copper. We show some sensitivities to the various commodities on the right. And with our long-term long-life reserves and large-scale production, we’re really in a position to benefit from future metals intensive growth trends and the prospects for increasing cash flows and cash returns under our performance-based pay-out framework.

On slide 13, we provide an update to our capital expenditures. Current forecast and these exclude the Indonesian smelter project, which is being funded with cash that we released last year in a bond offering. But our current forecast for 2023 totals $3.5 billion. That’s up from the prior estimate of $3.4 billion and capital expenditures for 2024 are currently forecast to approximately $3.3 billion. The change from our prior guidance principally reflects investments we’re planning at Bagdad to jump start early works to support optionality for future expansion. The bad debt investments or projects that we categorize as discretionary and do not reduce the cash available for distribution under our pay-out policy as they will be funded with the remaining 50% of free cash flow retained for growth projects.

On slide 14, we got some great pictures showing the construction of our new smelter in Indonesia. This is a major undertaking for us. It’s impressive and it will be on a world-class scale. The project will become the world’s largest single-line flash copper smelting facility and it’s advancing rapidly. We expect to commission the project in 2024. The project will include a precious metals processing facility and an expansion of the existing nearby smelter and it will align with Indonesia’s downstream policy and enable PT-FI to process all of its concentrates domestically. In closing, on slide 15, we summarize our financial policy, which is centered around three priorities with the cornerstone being a strong balance sheet and we’ve achieved that.

Our balance sheet and liquidity are strong and provide significant financial flexibility for the future. We’re executing the performance-based pay-out policy, which provides for 50% of our free cash flow to be allocated to shareholder returns in the form of dividends and share purchases and the balance available to invest in our projects. We’ll continue to pay a base dividend and a variable dividend at a combined annual rate of $0.60 per share. And since commencing the performance-based pay-out policy in 2021, we’ve returned about 60% of our free cash flow to shareholders and it further strengthened our balance sheet along the way, providing capacity for funding new projects over time. We did not purchase shares in the first quarter, but have availability under our share purchase authorization to conduct purchases, pursuant to the policy and we have a positive outlook for substantial free cash flow generation in the future depending on prices and other factors.

The three priorities of balance sheet strength, allocating cash flow to a mix of shareholder returns and organic growth, we believe will enhance long-term value for the benefit of our shareholders. Our global team is energized. We’re motivated to continue building value in our business and we’re executing our plans responsibly, safely and efficiently. Thanks for your attention and we’ll now take your questions.

Q&A Session

Operator: Ladies and gentlemen we will now begin the question-and-answer session. Our first question comes from the line of Chris LaFemina with Jefferies.

Christopher LaFemina: Hi. Thanks, Operator. Kathleen, Richard, thank you for taking my question. I actually have a bunch of questions, but I’ll just ask one and then I’ll get back in the queue. There’s a lot of M&A activity happening in mining, obviously, at the moment, and copper seems to be a major focus. And I know — I think Richard has talked a little bit about looking at M&A opportunities in the past, but you obviously haven’t done much in recent years. And I’m just wondering with your overall philosophy is around M&A? Are there jurisdictions that you’d be focused on? Is it important to have operational synergies? Are there any kind of key criteria that you would consider or is it just really about being opportunistic? And then secondly, is M&A something that is increasingly on your radar screen just as a result of consolidation in the industry in general? Thank you.

Richard Adkerson: Thanks, Chris. As you know well for a long time now, I’ve been saying that consolidation would come to our industry. It’s inevitable because of the challenges in developing projects. And it’s not just a price issue, it’s really just the availability of actionable projects for companies to pursue and companies in our industry that are diversified companies have had copper at the top of their strategic list for a long time. It’s notable of the overall lack of success in developing new projects. There have been a few, of course. So all those things come together and lead to what we’re seeing going on right now with M&A activity. Now for us, we don’t have a strategy of growing through M&A. We are focused on our large-scale inventory of reserves and resources that Kathleen described.

And but that does not mean that we would not take advantage of opportunities that may arise. So we’re not defining regions or any other criteria. We would only do something if it was clearly something that was value enhancing for our shareholders. So we’re not in a position of looking for things to do. But now with our company having made such great progress in strengthening our balance sheet, completing the major underground conversion at Grasberg and advancing on all fronts, we would be in a position if an opportunity arises, but it would only be in that case.

Christopher LaFemina: Okay. Thanks.

Operator: Your next question will come from the line of Emily Chieng with Goldman Sachs. Please go ahead.

Emily Chieng: Good morning, Richard and Kathleen. My question is just around the leaching technology that you’ve talked a little bit more about today. And I wanted to dig through the 600 million pounds of step change in leaching volumes there. I think as we talk about the third-party catalytical leaching technology, I think that’s been deployed at El Abra and Bagdad currently. What percentage of that 600 million pounds does that account for? And perhaps could you talk to the time line to getting there? And whether or not this could mean the El Abra expansion mill expansion could be delayed further if there’s a strong success there?

Kathleen Quirk: Emily, it’s Kathleen, and I’ll let Cory Stevens fill in on this because he’s leading the efforts. But in terms of the additional 600 million pounds, a portion of it could be through these additives, but it’s important to note that the additives that we’re pursuing are both internal and through third-parties. And we’ve got a trial going on with a relatively small stockpile at Bagdad with Jetti. And we’ve got some new initiatives going on with Jetti at El Abra. But the bulk of what we’re outlining here is initiatives that we can pursue on our own there. It’s really not — there’s a lot of innovation involved and technology involved, but it’s not rocket science. And the sensors and data that we have now is pointing us to where the issues are, where is the solution not getting through the stockpile, where is the stockpile not getting oxygen to it.

So these things can add — once we identify the problem, we, as an industry, can fix — can find a solution. And at Freeport, we have such big stockpiles. That’s why we have such a big opportunity here. So the bulk of what we’re talking about, the opportunity we’re talking about is largely at Morenci. Morenci is — you see — you look at our 38 billion pounds and look at the percentage of Morenci and that’s where the bulk of the opportunity is. But if we are successful with this, potentially at El Abra, it might, we don’t know yet, but it might compete with traditional mill technology. But we’re really looking at what’s available now through third-parties, but our initiative and our objective is to find a way to solve this on our own because that’s the best way to maximize the yields for Freeport.

But, Cory, do you want to add anything to those comments?

Cory Stevens: Yes, Kathleen, no, you said it well. So our R&D efforts, we’ve been chasing some internal leads that look very promising. And then in the first quarter, what we’ve been able to do couple our work with artificial intelligence and machine learning much like how big pharma uses to develop their new products in a way that’s driving us to increase the breadth and scope of the candidates that we’re looking for implementation. And then in parallel we’re actually bringing in more capabilities to do quick tests and medium scale tests and in the field at scale tests, but that’s where we’re most excited and then coupling that with some of the temperature activities we see that our confidence is growing on that front.

Emily Chieng: Great. That’s very helpful. Thank you.

Operator: Your next question will come from the line of Carlos De Alba with Morgan Stanley. Please go ahead.

Carlos de Alba: Yeah. Thank you very much. Good morning, everyone. Just on Indonesia. I wonder if you can give us perhaps an update on how the conversations are for obtaining the export license, the extension of the export license in June? And also any conversations that you may have had with the government and your local partner on extending the contract beyond 2041 ahead of time? Thank you.

Richard Adkerson: Yes. Thanks, Carlos. It’s all of these things are happening in parallel with each other. To get the contract extension approved and there’s widespread support for it within the government, requires some procedural actions to deal with existing government regulations and then also to amend the IUPK that we were granted in December of 2018, that would be a fairly simple process. So we are really encouraged by it. The June date, it has to do with this broader issue the country is pursuing with downstreaming for minerals broadly. And so that’s why that was there. We don’t anticipate that will be something that would limit our ability to continue operations beyond June. Anything more, Carlos, to be specific on it.

Kathleen Quirk: I’ll just point out that our IUPK that we entered into that Richard referred to in 2018 allows us to continue exports through — at that point contemplated December 2023. And that has some force majeure provisions, which clearly the delays that we’ve experienced related to COVID and supply chains are force majeure. So our IUPK allows us to do it, but we need to get the approval from the government to put in this regulation after the IUPK was signed to restrict exports in a broad range and it’s not defined which minerals they’re trying to achieve. But we’re working with the government. We are keeping them informed and they’re visiting our copper smelter site. They’re very impressed with the progress that we’ve made.

Unfortunately, it’s not going to be finished. It will be — the construction will be substantially complete by the end of this year, but it won’t be completely finished. And so we’ll need the ability to continue to export. And importantly with the alignment we now have with the government ownership, it’s very important for the government revenues as well for exports to continue. So we’re going to continue to work on it. We don’t have the extension beyond June yet, but we do expect to get it.

Richard Adkerson: And Kathleen is right that we have these legal rights that are documented, but I want to emphasize, we’re working cooperatively with the government and not just pushing our legal rights and we’re getting a good response from it.

Carlos de Alba: Right. Okay. And just one clarification. For the extension beyond 2041 or the contract beyond 2041, is this something that requires legislative approval or is it just an executive decision, obviously, together with the ministries and all that?

Richard Adkerson: The government will decide really how to document it. There is a path forward for it to be done without formally going through new legislation. We do benefit now by having strong support within the parliament of Indonesia, who visited our operations, the parliamentary group overseeing mining came to the US and visited us here. So I just want to emphasize the whole tone has changed. The President visited our operations in late August, early September and it was a very positive. One of the highlights of my career there in Indonesia was his visits and we’re building off of this to find the right way forward and do it in a way that everybody wins from it. The government would win, the local community, the workforce, suppliers to our business.

So that’s how we’re working together to see how can we go forward and makes nobody benefits from us having any kind of drop dead date on operations there. It would really be hard to envision. And this 2041 date was in our original 1991 contract of work was carried forward in the 2018 IUPK and we actually have not done significant delineation drilling to see the extent of the resource beyond what’s been necessary to fill up the production profile through 2041. And yet, in doing that, we have a very substantial resource beyond that already identified. But I’m really excited about the opportunity to go in and drill to see — in the 30-plus year history of Grasberg, it always has gotten bigger over time. And I’m confident as we do more drilling, it will continue to be, to grow and be bigger just because of the nature of the ore system there and the grades that are available to us, it’s really exciting.

And so that’s what we want to achieve with the government is to get the extension granted then undertake an active program of delineation. We only report reserves through 2041 and this would give us a chance to develop reserves beyond that date and to develop — and to come up with plans for developing those reserves for future growth. It’s just a great long-term asset as a base for our company for its future.

Carlos de Alba: All right. Thank you very much, Richard and Kathleen.

Richard Adkerson: Okay. Thank you for your question.

Operator: Your next question comes from the line of Brian MacArthur with Raymond James. Please go ahead.

Brian MacArthur: Good morning. I just want to follow up a little bit on the leaching situation and I appreciate all the detail. I just want to clarify, I think, you said most of this was internal, so it’s not Jetti. But then you made a comment about the bulk of its Morenci. Morenci is sort of 50% of the stockpiles, but there’s a whole bunch of other North American stuff. Is there a tank house issue? Or is that 800 million constrained going forward by anything else? Or could it just be bigger if you can do stuff at Bagdad and Sierrita and everywhere else?

Kathleen Quirk: Brian, we have latent tank house capacity across the business of about 1 billion pounds a year. And it’s in different places. But that is what makes this so compelling is that there really isn’t a lot of incremental capital involved in these initiatives. So historical leach production, you go back decades, has declined over time. And we’re just having a resurgence of what it once was. And this new data available to us that’s telling us what’s going on within the stockpiles is providing us with a road map to kind of have a renaissance of the prior leach production. So if need be, we could invest in new tank house capacity, but the low hanging fruit is, we’ve got latent tank house capacity at many of these sites.

So we’re really approaching this across the footprint. But the highest impact is to-date has been at Morenci. And that will likely be the lion’s share of where we get additional pounds. But we have opportunities across the footprint. We also have inactive operations and active leach stockpiles that we can look to in the future. But the first — the lowest hanging fruit and the highest value is in places where we’re already leaching.

Richard Adkerson: Yes. Morenci is the world’s largest leaching operation today, and it was where much of the modern leaching technology was originally developed decades ago. So I just wish I could have a good way of conveying the excitement of our team working on this. It’s really fun to see. We’re leaching everywhere and we’re going to leach to the last drop. So it’s — and the benefits are just — no permitting to do this kind of stuff. There’s very little capital — tank house capital, if it’s necessary, is not significant in the bigger picture of things. And the climate — the carbon emissions are — so it’s a winner on every respect, and that’s why we’re working cooperatively with other companies and with Jetti and focusing on what we can do on our own because we do it on our own, we capture all the economics for our shareholders.

So it’s a multifaceted deal and like I said it’s really a lot of fun. It’s injected a level of enthusiasm into our whole organization that’s really fun to see.

Brian MacArthur: I might be pushing it here. But just as a related thing, you also talked about North American staffing, asset efficiency of 200 million pounds. So that has nothing to do with any of this. That’s independent. What actually is that part of the equation?

Richard Adkerson: Well, it’s not limited to the mining industry. Certainly, it’s not restraining us with our efforts to advance leaching. But it’s an issue that — as I talk with other CEOs in the business roundtable, everywhere people are experiencing it. Some of it grew out of COVID in the way people are approaching life work styles as they go forward, but it’s a real issue for us, and we’re attacking it by aggressively recruiting for people, but also its spurring our efforts to see what can we do with technology to make our business less labor intensive. But it is a real issue in the US, not in Peru, Chile, Indonesia, but it’s just a significant matter in the US.

Kathleen Quirk: But, Brian, it’s basically getting our mining rates up and also getting our plant and processing to reliability standards consistent with what we’ve experienced in the past. So some of the experience levels have impacted us for the reasons Richard just talked about. But this is — these are things — these are self-help items and we’ve already got efforts underway to work on it and a game plan for how we’re working on, but it’s an opportunity that we don’t need to go do a major project to go get. And so, again, the leach initiative, the initial leach initiative and this self-help work that we’re doing is some of the highest value opportunities we have in the near-term.

Brian MacArthur: Right. And while 1 billion pounds, I guess, it’s equivalent to being one of the biggest — one of the top five copper mines in the world?

Kathleen Quirk: Yes.

Brian MacArthur: Great. Thank you very much.

Operator: Your next question comes from the line of Timna Tanners with Wolfe Research. Please go ahead.

Timna Tanners: Hey, good morning. I want to look at —

Kathleen Quirk: Hi, Timna.

Timna Tanners: Thanks. I wanted to look at slide five and kind of the cadence as you described and kind of understand what the trajectory is going forward? So is the — it sounds like the Peruvian situation has really improved from what we hear. So is that fully behind and we can expect this run rate going forward? I know you talked about labor issues continuing, but I assume the weather, we are not going to forecast interruptions there. So I just wanted to get a little bit more about the cadence you’d expect in the regions and any impact on costs that might be lingering? Thanks.

Richard Adkerson: Kathleen, I’ll start by just making a comment about Peru. There are different issues in different parts of the country of Peru. And the — and our operations is located just off the outskirts of the city of Arequipa, in the Arequipa region. And while there were protests there, they weren’t as large as a protest in other areas. And we did have some disruptions of personnel movement and supplies for a period of time. And in our region, it has improved. The issues have not been resolved in the country. And so that remains there as an ongoing risk. But as you look at this trajectory issue, I think, it’s important to look at individual regions and see what’s going on there and not assume that because we made such improvement that that’s carried forward to the same extent in other regions. So it’s complicated. This whole business is complicated, but that Peru is very complicated.

Kathleen Quirk: And Timna, you can look at slide 26, and that has our quarterly sales volumes for the balance of the year. The first quarter was impacted by these disruptions, but also we had the conversion to tolling in Indonesia, which we had projected going into the quarter. But you can see where we expected to be — where we expect to be on a run rate for the balance of this year. And you can see very, very strong recovery from first quarter in the balance of 2023.

Timna Tanners: Anything on the cost side as a second part of the question, I had asked? Is that also kind of out of the woods for most of the group besides the labor issues?

Kathleen Quirk: Well, the first quarter, we had $1.76, and we’re projecting for the year to average $1.55. So our cost — unit cost in the balance of the year will be less than they were in the first quarter. We talked about some of the inflationary items easing from last year and that’s principally energy. We saw the big spike in energy starting around this time last year. And some of the other input costs that were exacerbated by the Russia-Ukraine situation. Some of those things have declined in East and so that’s that is helpful. But we still have labor or services costs that were contracted for some of our components, equipment components, all those things are still with us in 2023. So we’ve got some elements of relief and some elements of costs that are higher. They’re no higher than what we estimated at the beginning of this year, but still higher than they were last year.

Timna Tanners: Got it. Thank you.

Operator: Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research LLC. Please go ahead.

John Tumazos: Thank you for taking my question. Could you give us some color on the February escalation $38 spot moly whether there was some specific shortage, probably there were some high purity customers that had to get the good moly? I noticed that the Spence concentrator began reporting moly output to Cochilco for January and presumably Quebrada Blanca will start in April and May. You were not the source of the supply increase, but maybe you have some insight as to where this — where else the supply might have rebounded when the price doubled? Thank you.

Kathleen Quirk: John, I’ll comment and Mike Kendrick can add to it. But partially, what happened in the first quarter was some of the same supply issues from moly that impacted copper. And the situation in South America, particularly in Peru, did have an impact on supplies. And at the same time, we were seeing some strong growth in demand. So there’s extreme tightness in the first quarter and some of that got relieved in Peru when things started to return to more normal operations. We continue to see, as we look forward, demand drivers for moly being positive in the supply side, which will fall a lot like copper is it’s just a challenge to bring on new supplies. And many times, as you know, in a copper mine that has byproduct moly when people get into trouble with operating constraints.

Copper is the one that people try to maximize and sometimes may moly isn’t maximized in those scenarios. But that was, I think, the main thing that occurred from a moly perspective on supply. And Mike, I don’t know if you want to add. There’s other things that we should add to that.

Michael Kendrick: No, I think you captured it very well, Kathleen. I mean when you — I think it really highlights what a tight physical market moly is. And as a result, there’s no attenuation when there’s a demand need in any given week, and there’s not supply available, you can see both rapid increases and rapid decreases through the system. And as to your question on quality, we’re a large player in that area and we conduct that business under contract. So most of our high quality material has designated 100% all the time to those products.

John Tumazos: Thank you.

Kathleen Quirk: Thanks, John.

Operator: Your next question comes from the line of Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas: Good morning, Richard and Kathleen.

Kathleen Quirk: Good morning.

Michael Dudas: As you indicated in your prepared remarks, you talked about observation there years ago. The market was in surpluses or balanced to maybe slight and what you witnessing talking about other and the fact that this consolidation may take attention away from growth capital and to acquisitive capital. What do you think the risk is a year from now that the market is there upside or downside risk towards supply given those dynamics as you work through it over the next 12, 18 months?

Richard Adkerson: You were breaking up a bit, but you were asking about the supply side risk assessment, right?

Michael Dudas: Yes, yes.

Richard Adkerson: So if you go back several years when the projects that are now coming on stream were first announced there were to be massive. There was projected massive surpluses in this calendar year and calendar year ’24-’25 and those projects got delayed for different reasons, COVID hit, and they’re not having the major surplus situation this year as markets basically balance and looking ’24 there’s potential services. But there’s not new projects of significance coming on stream after that. So I would say that the supply side risk is more — much more on the downside. We’ve seen issues related to meeting production, projections being higher for various reasons. The Peru situation and operational issues like we had in Indonesia occurred in other places.

So I think for — if you look back for a long-term history, supplies projections tend to be — the projections tend to be higher than reality when experience actually happens. And I think that’s where we are now. It’s — we have this leaching project, which gives us some upside. But overall, the risk, I think, are more on the downside.

Michael Dudas: Thank you, Richard.

Richard Adkerson: Thank you, Michael. Appreciate it.

Operator: Your next question comes from the line of Matthew Murphy with Barclays. Please go ahead.

Matthew Murphy: Hi. Just a question on the cash flow statement. Non-controlling interest distributions were zero this quarter, which I guess it’s happened a few times in the past, but what drives that? And in this case, is it — should we assume that there’s going to be a bit of catch up later in the year?

Kathleen Quirk: The first quarter, we had some significant taxes that was expected. We had some significant taxes that we paid in the first quarter related to the prior year period. And so we did not have distributions in the first quarter as that was used to fund those expenses. But we do expect that you’ll see that line item increase throughout the year. We’re generating a lot of free cash flow at PT-FI and at Cerro Verde and that those funds will be distributed. So in terms of thinking about it, we do provide some guidance on the impact of non-controlling interest on our net income and the estimates for cash flow are similar to that, maybe a bit lower than the earnings impact, but somewhere in that neighbourhood.

Matthew Murphy: Okay, That’s great. Thanks.

Operator: Your next question comes from the line of Orest Wowkodaw with Scotiabank. Please go ahead. Orest, may be on mute. Our next question will come from the line of Lawson Winder with Bank of America Securities. Please go ahead.

Lawson Winder: Thank you, operator. Good morning, Kathleen and Richard. Very nice to hear from you. Thank you for fitting in my question. I just wanted to touch on Chile where there’s been some positive developments. Is the environment there now improving in the correct direction such that El Abra might look more promising for an expansion? And then could you just also please share your views on the outlook for the regulatory environment there for mining? Thanks so much.

Richard Adkerson: Well, Lawson, it’s still uncertain. And while there were some — from our perspective, some positive developments that have occurred since this process started, we’re still waiting to see where it ends up. There’s fiscal issues relating to royalties and taxes. There are also regulatory issues related to water use and other impacts on the environment. And bigger picture is better than it has been, but there’s still significant uncertainties that we and other miners will wait to see how they play out.

Kathleen Quirk: We’re doing some things now to maintain optionality. We’re planning some investments in desalinization which will not only benefit the opportunity for us to extend existing operations, but also give us some ability for the potential mill project. As we talked about earlier, we’re doing some work on leaching, and that could continue to evolve our expectations about the design of the new expansion project. So we’re keeping options open. We’re making some advances to enhance that optionality. But the project at El Abra is very strong. We are in the process of updating our capital cost numbers to reflect what the current environment is. But El Abra has a huge resource. We’re talking about potentially increasing production there and you saw the numbers in the press release I mean in our slide presentation.

And that project is likely a project that will get done. It’s a question of — it’s not if, it’s when. And we’re working to keep the analysis updated so that — and move forward with some of these initiatives to put us in a position to move more quickly when we make the decision.

Lawson Winder: Thank you both very much.

Operator: Your next question comes from the line of Bendik Folden Nyttingnes with Clarksons Platou Securities AS. Please go ahead.

Bendik Folden Nyttingnes: Thank you. Looking at that potential doubling in demand within a 12 to 15 year timeframe, what’s your thoughts on taking on one of those large scale resources in some of the more underexplored jurisdictions of the world and bring it forward as a greenfield project? Is that something you’re looking at, at all, or will you rather focus your strengthened balance sheet on the organic growth pipeline and potential industry consolidation?

Kathleen Quirk: Richard, I’ll take that one. We’re really focused on our organic opportunities, then you see the portfolio we have, we’re really fortunate to have organic growth that some others not everyone has within our industry. And as we’ve looked at greenfield opportunities over many years, you haven’t seen huge greenfield success. It’s rare. It’s not — we’re not saying it can’t be done, we keep our finger on the pulse of what the availability of greenfield is. But our focus is on our brownfield opportunities, the leach opportunities we had, someone noted earlier that it’s a major top line if we can get this leach opportunity to reality. And so our focus is more on the lower risk more certainty around our brownfield opportunities while continuing to monitor what’s available in greenfield. We spent a little bit of money on greenfield exploration. But our focus, because of our pipeline and asset profile, is focused more on brownfield.

Operator: Our next question will come from the line of Chris LaFemina with Jefferies. Please go ahead.

Christopher LaFemina: Hi. Thanks, operator again. So, Kathleen, you mentioned the increases in CapEx guidance relate primarily to early investments in Bagdad for future expansions. I think back in October, Richard had said that investment in growth was on hold because, obviously, the macro environment was not very good. So I’m just wondering, has anything changed in Freeport’s view of the world over the last six months? Is it just that China has reopened? Is it because supply issues are getting worse or is there just no change and this was kind of the natural progression for these projects? Thanks.

Kathleen Quirk: Not really any significant change. This really gets to optionality. The work that we’re doing on — the early works, a lot of it relates to tailings infrastructure that we would have to do anyway several years out, but we’d have to do any way to support Bagdad’s life of mine plans. And so this is bringing some of that forward, so that if we do decide to move forward with Bagdad, we’ll be in a better position to bring it on more quickly. But it doesn’t change. We still have the challenges of Bagdad of just not only just economic uncertainties, but the challenges of just housing and people for the project. But this project, the acceleration of the tailings infrastructure will give us options as we go forward. And that’s what this is really all about for us is maintaining optionality within our portfolio to be able to, none of this happens overnight, but to potentially move more quickly. And when I say more quickly —

Christopher LaFemina: Has your view about copper changed?

Richard Adkerson: But having said that, and without underappreciating the uncertainties in today’s world, I would say, for our industry, the economic situation has improved from where it was midyear last year. Throughout this, China’s demand for copper in the second half of the year was strong. I believe it was the strongest second half that they’ve ever experienced. And we’re encouraged by the GDP growth in 2023. We recognize the comments about it being driven by consumers and that there’s continuing issues. Inflation has improved. And so I think the overall environment has improved in recent months. But as Kathleen said, that’s not really what’s driving our decisions. The Bagdad project faces worker issue, housing issues. Chile is restrained by continuing political uncertainties.

But we’re — we believe all these projects will be needed by the world, they’ll be very profitable for our shareholders. And so we’re investing in them, planning for them and anticipating that the time will come when we execute on them.

Christopher LaFemina: Great. Thank you. That’s very helpful.

Operator: Our final question will come from the line of John Tumazos with John Tumazos Very Independent Research LLC. Please go ahead.

John Tumazos: Thank you. Looking at slide 14, that includes the desalination plant, could you give us a little bit of background on that? It rains a lot, obviously, in Indonesia. Why were freshwater supplies not adequate? Could you have used saltwater for cooling? I’m assuming that most of the water is for cooling and the big smelter? Or is this sort of a community relations thing to not draw upon local water supplies?

Kathleen Quirk: We looked at a number of options, John. This is not of water, and this isn’t a big part of the project in terms of capital requirements. We thought this was the best option for reliable water for the project. But Corey I don’t know if you want to add anything to that, but that was the thought process, but we did look into a number of options for water and designing the overall configuration.

Cory Stevens: Yes. We looked hard at freshwater options. And when we make a decision around water, we’re looking decades out in the future and what the social — potential social impacts are going to be and what future demands are going to be and the renewability of those sources and came to the conclusion that desalinization was the best route and then you look at the capital cost differences to use saltwater versus desal and this became the most prudent route for us.

John Tumazos: Thank you.

Operator: I’ll now turn the call back over to management for any closing remarks.

Richard Adkerson: We appreciate your participation and your interest. If you have further questions, contact David Joint, and we’ll be happy to respond to them. We look forward to reporting in the future on our progress.

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