Freeport-McMoRan, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoran third quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question during the Q&A session, press star one on your touchtone phone. If you require assistance during the conference, please press star zero. I would now like to turn the conference over to Ms. Kathleen Quirk, President. Please go ahead, ma'am.

Thank you and good morning everyone. Welcome to the Freeport-McMoran conference call. Earlier this morning we reported third quarter 2022 operating and financial results and a copy of today's press release and slides are available on our website at fcx.com. Our call today is being broadcast live on the internet and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has also been invited to listen to today's call, and a replay of the webcast will be available on our website later today. Before we begin our comments, 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. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our annual report on Form 10-K filed with the SEC. On the call today with me, Richard Ackerson, our Chairman and Chief Executive Officer. Marie Robertson, our CFO, is on the line. Josh Olmstead, who heads our Americas operations, is on the line. Mark Johnson, who heads our Indonesian business, is on the line. Rick Coleman is on the line, who helps us with projects and construction. Corey Stevens is on the line, who is spearheading our engineering and technical services groups, including the leaching initiatives. And Mike Kendrick's on, who runs our molybdenum business. We also have Steve Higgins, our chief administrative officer. Richard's going to make a few opening remarks, and then we'll turn to our presentation slide materials and go through that and then open up the call for questions. And so now I'd like to turn the call over to Richard for his opening comments.

Thank you, Kathleen, and we really appreciate each of you joining our call today.

I'm just going to make brief comments. about how our company is positioned in the current market and for what we believe will be a very bright future for the copper business as we go forward. As we talked about on our last call, it remains a world of two cities. The macroeconomic sentiment continues to be weak, and you all see that in your everyday lives. On the other hand, the fundamental physical copper market is strikingly tight globally right now. The macroeconomic situation is driven by the strengthening U.S. dollar, the Fed and central banks tightening concerns about China dealing with COVID in its property section, and then the serious problems in Europe coming out of the Ukraine situation and how that's affecting energy prices, and economic outlook. All those things are realities we have to face up with, but we continue to work to position our company to deal with these situations. We now have a very strong financial situation that allows us to do that effectively, and we are increasingly confident about the outlook of the of the copper markets and where Freeport's positioned to take advantage of that and our confidence continues to grow. Global copper inventories remain at historical levels. You see production reports from producers across the globe reporting challenges in meeting their production targets and the industry is facing increasingly challenges in developing new supplies. In the current environment, stretched supply chains, production shortfalls are becoming commonplace, and cost curves are rising. We at Freeport are realistic about the potential for weaker global GDP. We've prepared our business and taken steps and have plans for further steps to take depending on the near-term steps of what occurs. We have an old saying around Freeport, we don't wring our hands, we roll up our sleeves. The positive thing is that new sources of copper demand are emerging now, and there's widespread recognition that copper demand will be significantly benefited by the ongoing global electrification around the world, investments to reduce carbon. They're beginning to accelerate, and this is going to occur more rapidly in the future, and it's going to be a big impact on copper demand. To meet that demand, the energy transition will require a massive amount of copper and other steps to deal with it. Higher prices will be required to bring on new supplies. uh higher much higher prices than we have now simply because the current price is not sufficient uh to incent new supply development on the scale that will be required to meet this increasing demand i'm real proud of our freeport's global team we're focused on executing our plans effectively and focused on managing what we can't control and not getting distracted by things we cannot control. I want to particularly highlight our Grasberg team for the great results they achieved this quarter and the ongoing success our team is achieving in ramping up the large-scale, low-cost underground operations in Indonesia. Just three years ago, we were completing mining the open pit and what this team has achieved despite the challenges of COVID, is truly remarkable. I was pleased to visit our site in Papua during this past quarter and had the pleasure, along with our team, of showcasing what we've accomplished during a visit by Indonesia's president, Joko Widodo. He was the first president of Indonesia to visit our job site since Suharto did in the early 70s when production there commenced. And it was truly a pleasure to be able to show him what we've accomplished, what we are accomplishing in the underground, and to point out our workforce there where 98% of our employees are Poplins, are Indonesians, and over 40% are Poplins. It's really noteworthy that he was there and he expressed a lot of positive comments about it. For me, it was something that was really special since I've been going there for over three decades and to be able to review it with him. As a follow-up, he asked me to accompany his Minister of Investment on a roadshow-type tour of six universities, seven universities in Indonesia and, you know, They estimated there was 10,000 students and faculty at these sessions as well as it was streamed live to many more. That was a special time for me and for our company and it just illustrates the much improved partnership we have now with the government of Indonesia and the president and his ministers. I just want to close by saying just to reemphasize how I believe we are well positioned at Freeport to be a global leader in the copper business. We have long-line reserves, large-scale global operations, established track record of managing responsibly the development and operation of among the largest mines in the world. We've got a great team that's been experienced and stuck together through all the things we face. And so I'm just very pleased about that. We're going to take steps to create value for this company over time. You'll hear today about the exciting work we're doing with leaching technology that can add values in a low-cost, carbon-friendly way. We've got large-scale brownfield development projects ahead of us, and we're going to continue to use technology to help us operate efficiently and create value. So with that, I want to turn the call over to Kathleen, who will review the quarter and our outlook, and then I'll look forward to your questions.

Thank you, Richard. And we'll start on slide three with a summary of the quarter's highlights. As you've seen, we achieved strong production and sales performance in the quarter. As Richard mentioned, we're continuing our focus on effective execution of our plans in a challenging environment. Sales volumes for copper were 3% higher than last year's third quarter and 4% higher than our guidance going into the quarter. Our gold sales were above the year-ago quarter by 19% and 20% above our July guidance, and that reflects very strong performance at Grassburg during the quarter. From a cash cost standpoint, our consolidated average unit net cash costs were $1.75 in the quarter. They averaged $1.75, and that was about 5% above our estimates going into the quarter. As Richard referenced, cost pressures continue to be a significant issue for our operations and really across the global mining industry. In the current market, many of our input costs are above historical correlations to the copper price. We can't predict how long this dislocation will occur, but based on history, we typically see a high correlation of many of our input costs with the price of copper. As Richard mentioned, we're going to continue to focus in those areas of cost and efficiencies that we can control to help mitigate these cost increases. Adjusted EBITDA in the quarter was $1.5 billion. This was net of $228 million reduction associated with copper sales that were provisionally priced at the end of June at 375 per pound, which remained subject to final settlement. The decline in copper prices during the quarter resulted in this negative adjustment. We've got a reconciliation of the EBITDA calculations on page 31 of the slide deck. Adjusted net income for the quarter was 375 million that excludes two cents in non-recurring gains that are detailed on Roman numeral page seven of our earnings release. So 375 million or 26 cents per share in the third quarter of adjusted net income. Operating cash flows of roughly 800 million in the quarter approximated our capital expenditures Our capital spending during the quarter included $400 million for major projects principally associated with our Grasberg underground projects and $200 million to advance construction on the Indonesian smelter. During the quarter, we continued opportunistic purchases of our public debt securities and open market. So far in 2022, we've purchased approximately $1.1 billion of our notes at a discount to par, including $400 million in principal amount in the third quarter. The market conditions in recent months have provided a great opportunity for us to reduce our absolute debt levels at attractive prices, and these purchases generate approximately $50 million per annum in interest cost savings. We continue to maintain a strong balance sheet. We've got a large cash balance and significant liquidity. We ended the quarter with $1.3 billion in net debt, excluding the $800 million in net debt associated with the Indonesian smelter. That's well below our targeted net debt range of $3 to $4 billion. The authorization under our share purchase program remains at $3.2 billion. Since reaching our net debt target in the range of $3 to $4 billion in the middle of last year, we've used over 50% of our free cash flow for shareholder returns. That totaled $2.7 billion in share purchases and dividends over that period. We did not purchase shares since mid-July, and that reflects our priorities on our balance sheet and our policy of using excess cash flows for shareholder returns. and the timing of our future purchases will be dependent on our cash flows and overall market conditions. I want to point out that we recently published our updated annual climate report that's available on our website. The report includes an update on our progress to improve our energy efficiency and integrate lower carbon alternatives into our operations, and we're making great strides in that area. As Richard talked about, and we talked about on our July call, we commented on the magnitude of the sharp decline in copper prices that we experienced in recent months. We benefit from having the balance sheet, the asset quality, and experience to successfully manage an uncertain market environment. And despite the recent weakness, we remain confident in our strategy, centered on being foremost in copper. We're positive about the strong future fundamentals for copper, and the strength of our assets and team to increase value for stakeholders. I'll move to slide four, which is a graph of the year-to-date copper prices. We discussed on our last earnings call that the price move appeared to be anticipatory and financially driven by global macroeconomic conditions. This backdrop continues to be challenged by rising interest rates, the tame inflation, concerns about Chinese economic growth, and pressures in Europe associated with energy and geopolitical turmoil. We also indicated on our last call that markets remain strong, physical markets remain strong for copper. Our customers were reporting solid orders, physical market was tight, as evidenced by low levels of inventories. The situation is much the same today. Copper demand remains healthy. The industry continues to struggle to meet production targets, and inventories remain low by historical level. And as we look forward, we see copper demand that will benefit from the substantial requirements for metals required for electrification and the energy transition. This new demand is emerging and is driven by secular trends rather than economic cycles. The industry does not have a current pipeline to meet this demand, and the recent weakness in copper prices will only make this development more difficult. Richard talked about, we're realistic about the current macro conditions creating uncertainties, but we do have strong conviction about the long-term fundamentals for the copper markets, and we expect to start seeing, as we go through this period of increased demand from decarbonization, large gaps, supply-demand gaps emerging in the copper market. On slide five, we'll turn to operations, and you'll see we present here a summary of our sales by region for the third quarter. And I'll just go through around the globe how our teams are doing. Starting with the U.S., our teams are focused on meeting our production targets safely and efficiently and overcoming challenges with limitations on available labor. We're ramping up the Safford mine, we're ramping up mining rates in the U.S., and we're aggressively pursuing leach production and continuing to study the possible expansion of the Baghdad mine in northwest Arizona. Moving to South America, our team at Cerro Verde in Peru continues to execute very effectively and produced at an average of over 400,000 tons of ore per day through the concentrator during the quarter. We faced some challenges during the quarter with byproduct molybdenum productions, and that impacted net unit cash costs. The team is doing great work to overcome this challenge as we look forward into the fourth quarter and beyond. And we're particularly proud of the exceptional work Sara Verde does in the community, and a sustainable model for the operations. At Alabra, we're continuing to optimize the existing operation while we consider the larger expansion options in the future. Richard talked about Grasberg. We benefited from continued outstanding execution of the plans that allowed us to exceed our third quarter sales guidance with strong production results in the quarter. higher than forecast grades, and an exceptional loading and shipping performance. The team loaded and shipped all of its third quarter production and available concentrate inventories during the period. We're also continuing to advance several projects at the site related to our mill work to add a new mill circuit, working on power infrastructure. We're continuing to advance the development of Kuching Liar, And we're progressing with construction of the new smelter in eastern Java with a targeted completion of that project in 2024. We show unit costs at the bottom of the slide on a consolidated basis. As I mentioned, the costs in the third quarter were about 5% above our guidance. That mainly on a consolidated basis was associated with higher maintenance and the increased cost of supplies. Breaking it down by region, the U.S. was challenged with higher maintenance, supplies, and labor. In South America, the variance to our expectations related to lower molybdenum byproduct credits, and Grassford was in line with our prior estimate, but there were offsetting variances. Higher maintenance costs and supply costs were offset by stronger gold byproduct credits in the quarter. We've adjusted our annual cost guidance for 2022 to average $1.55 per pound. That compares with the previous estimate of $1.50 per pound, and we've got a reconciliation provided in the reference materials on slide 22. On slide six, we wanted to highlight the progress at Grasper that Richard referred to. Since reaching the targeted run rate in the second half of last year, the team at Glassburg has just done a great job demonstrating sustained large-scale production for several quarters now. We benefit from our industry-leading expertise in block caving and we're effectively managing the largest underground mining complex in the world. This is a major accomplishment not only for our company, but in the history of the global mining industry. The resource at this site where we've been operating for over five decades is significant. And with the success of this project, we're engaged in discussions regarding an extension of our operating rights beyond our current 2041 timeframe. Richard talked about earlier, we've got some pictures from the visit on the slide. We were honored. in late August to host Indonesia's president at the Grassberg site. He toured the site extensively. He visited the former surface mine, had an in-depth tour of the underground, and actively engaged with our team. He expressed great pride over what has been achieved technically and for the people of Papua and the country. It was really a happy time, special time for our entire team. who's worked so hard over the years to make this project such a success. Another exciting area that we wanted to talk more about today on slide seven is our leach innovation initiatives. This is really focused in the Americas and our drive for capturing higher recoveries from leach stockpiles is gaining a lot of momentum. The economics of this opportunity are extremely attractive, very low capital intensity, low incremental operating costs, low carbon footprint, the lowest cost copper units in our America's portfolio, and the carbon intensity is low because the mining costs have already been incurred. And so essentially what we're doing here is extracting more copper from what historically would be considered waste. We're using new data analytics capabilities and those are providing valuable information to guide us and prioritize our work on the highest value. We're continuing efforts to retain heat in the stockpile. We're moving forward to apply covers to our leach stockpiles because the retention of heat within the stockpiles is proving to enhance recoveries. We're also applying solutions to new areas that were not pursued historically, and we continue to test various additives that can further enhance recoveries. The progress to date and early results are leading us to a target run rate of 200 million pounds by the end of next year, and that is at the top end of what we were prior thinking was 100 to 200 million pounds. Success at this level would give us a roadmap to scale larger, and that's what we're focused on. And we're really taking advantage of the long history we have in leaching significant stockpile material, the availability of new technologies that weren't available in the past, and we're in a really strong position to lead the innovation in this area. We're managing this project and this initiative as we would a major project, and when we think about it, it's similar to a similar production to what we would look at a project within the U.S. to add concentrators, but we don't have the capital associated with it and the operating costs are very low. So we're allocating a meaningful amount of significant expertise and technical resources and are aggressively pursuing this opportunity. I'm going to move to slide eight, which provides a three-year outlook for our sales volumes As you'll see, the 2022 volumes are very similar for copper, 4.2 billion pounds of copper for 2022. Gold sales are about 5% higher than our prior estimate for the year. And that reflects the better graphic record. The sales mix for 2022 is roughly 35% coming from the U.S., 28% from South America and 37% from Grassburg. You'll note that our 2023 copper sales guidance have been adjusted. They're lower by about 150 million pounds from our prior estimate. That's roughly 3%. About half of this is a timing matter and does not represent a production shortfall. And this goes to... a change in the commercial agreement um of our of our arrangement with pt smelting the existing smelter in indonesia which we own a 40 interest in currently that commercial arrangement is converting in 2023 to a from a purchase and sale agreement to a towing agreement and so ptfi's production a portion will be deferred into an inventory until final sale but It does not represent a production shortfall and in fact PTFI's production is going very well in line with expectations. The balance of this change is associated with updated mine plans in the Americas and that includes the impact of anticipated lower grades than we were previously forecasting for 2023 at Cerro Verde. The rest of the guidance is pretty similar to what we were guiding to last quarter. And we're going to move to cash flows on slide nine. And you've seen these charts before. As a leading producer of copper, our earnings and cash flows have significant leverage to the price of copper. And we show modeled results for our EBITDA and cash flow at various Prices and with the current cost structure of the business which is we've talked about has has increased in in recent quarters We've shown a broad range of prices ranging from three dollars per pound to five dollars per pound Just recall remind everyone in the first half of this year prices averaged nearly 450 a pound and we're approaching a five dollars a pound earlier in the year. We don't believe the current copper price is sustainable long term given the cost structure of the industry, the need for new supply development in the future. Modeled results using the average of 23 and 24 with the current volume and cost estimates holding gold flat at 1700 per ounce and molybdenum flat at 18 dollars per pound Our annual EBITDA would range from roughly $6 billion per year at $3 copper to over $14 billion per year at $5 copper. And our operating cash flows, net of all of our taxes, would range from $4 billion per year at $3 copper to $11 billion at $5 copper. So a lot of leverage to the price of copper. We show sensitivities to the various commodities on the right. As Richard talked about, we're prepared to manage in a low-price environment while retaining optionality for what we believe will be a much more positive situation as we go forward. And we've got this long-lived asset base that will prove to be valuable given the compelling fundamental outlook. Looking at our capital expenditures on slide 10, You can see that we've reduced the 2022 capital forecast by 400 million, gone from 3.1 billion in our prior forecast to the 2.7 in the current forecast. About half of that has shifted into 2023. As we've talked about all year, we've been spending capital at a slower pace than our original plans. something to do with just the supply chain and labor and other things that have deferred the projects. But we're continuing to prioritize the critical projects. We're going to continue to evaluate opportunities as we look at our capital spending plans in the context of the market environment to defer spending when it makes sense. We have a lot of flexibility with our plans and we benefit from the fact that the major investments required for the Grasberg transition are largely behind us. These amounts exclude capital for the Indonesian smelter project. That project is being funded with cash from a bond offering that we raised earlier in the year. There's some details on this project and its progress in the reference materials on slides 27 and 28. Construction is moving forward. We're working to complete the project as early as we can. Currently expected to complete it in 2024. And to date, we've invested about $800 million in this project. We'll talk for a minute about the financial policy and our strong balance sheet. Going to the balance sheet, it's really the cornerstone of our financial policy. The steps we've taken in the past place us in an exceptionally strong position, particularly in the context of the current market weakness. We don't have a need to raise new capital for the foreseeable future, and essentially all of our debt is fixed rate. We continued, as I mentioned, our opportunistic purchases of debt during the quarter, and we purchased over a billion dollars in senior notes at attractive prices. The slide here shows our net debt at $2.1 billion at the end of the third quarter. That includes $800 million for the smelter, so when we look at our net debt compared to our target, it's $1.3 billion. which is below a net debt target of 3 to 4 billion, and so that gives us some cushion. We've also got a very much cash balance of 8.6 billion, and that continues to provide significant liquidity for us. As you'll see here, we have a very attractive debt maturity profile. We've got easily manageable maturities. We've taken steps to improve financial flexibility. We did some transactions to increase PTFIs revolver. We did the same thing as Sara Verde and just this week we completed the extension of our corporate revolver, which was previously planned to mature in 24. We've extended that to 2027. In closing, We're showing a scorecard on slide 12 of the shareholder returns, which have been substantial since reaching our net debt targets last year. Just as a reminder, the financial policy provides for the distribution of 50% of our free cash flow and shareholder returns with a net debt target in the range of $3 to $4 billion, excluding the smelter debt. We pay a base dividend and a variable dividend totaling $0.60 per share and $0.30 per share of that is variable. We've used $1.8 billion of our $5 billion in share purchase authorization. Our variable dividend is continuing through 2022, and our board will have the opportunity to review future dividends depending on performance. As I mentioned, we've returned $2.7 billion to shareholders. This represents over 50% of our free cash flow over this period, and we're well below our net debt targets. As I mentioned, we did not purchase shares since July 22, and that reflects just the priorities on the balance sheet, the impact of the sharp decline in copper prices on our cash flows. We're going to continue to prioritize our balance sheet. We believe that maintaining the balance sheet strength in various market conditions is really important in our ability as we look forward to drive long-term returns for our shareholders. We're focused on long-term value, focused on execution, doing this responsibly, safely, efficiently. In the near term, with respect to growth projects, we're going to continue to define our future options but expect to defer new major investment decisions in the current market environment. We're convinced the world's going to need our projects in the future, and prices will need to move higher to incentivize the new project development. Richard talked about the pipeline of options we have. We've got a lot of flexibility in terms of the timing of development of these options, particularly the expansive options we have for development of new supply in the U.S. In closing, we're optimistic about the value of our assets, the strength of our team, the fundamentals of the copper business, and the future prospects for the markets we serve. I'll stop there, and operator will open up the call for questions. Thanks, everyone, for your attention, and we look forward to your questions.

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, press star 1 on your touchtone phone. If your question has been answered or you wish to remove yourself from the queue, please press star one again. If you're using a speakerphone, please pick up your handset before pressing the numbers. We ask that you limit your questions to one. If you have additional questions, please return to the queue. One moment please for our first question. Our first question will come from the line of Emily Chang with Goldman Sachs. Please go ahead.

Good morning, Richard and Kathleen, and thanks for taking the time this morning. My question is just around the leaching technology and understandably it's a low capex opportunity there to continue to bring production growth. So I wanted to understand the guidance that you have of 200 million pounds per annum by year end 2023. That's the run rate that you've targeted. Can you perhaps share what volumes you are seeing from leaching activities today and how should we be thinking about that RAM profile to get there? Thank you.

Thanks, Emily. We have experienced some positive, and that's what's given us more confidence to get to this run rate. We have experienced some improved recoveries, particularly at Morenci, where that's been the start of this focus, was at Morenci. That has offset the improvements that we've had in leach production during 2022. has offset some shortfalls we had in 2022 associated with lower placements as we struggle through the labor situation with mining rates. But in terms of the actual benefits to date, we are starting to see those. So you're talking about by the end of next year, getting to 50 million pounds per quarter on a run rate basis. We're already probably a third of the way there in terms of what we're seeing now. But what we've got to do is not only see the improvements in recovery, but get the material placed. And that's been the challenge in 2022 is getting additional material placed to meet our base production. But the leach initiative has helped us offset some of these shortfalls in other areas.

Great. Thanks, Kathleen. If I could squeeze one more just on the Baghdad expansion. It sounds like that's been at least pushed into 2024.

Well, we're completing the feasibility study. We expect to complete the feasibility study in the first half of next year. And so we'll have the opportunity at that point to look at the situation, look at the availability of labor, look at the inflationary environment that we're in in terms of executing a project in the environment, and look at the overall market condition. So what we're doing now is really getting to a point where we can make a decision and have the project feasibility ready to go so that we'll have optionality of when to start it. I think it's fair to say if we wouldn't pull the trigger today to start, we need to see some improvements in just the overall availability of labor, need to see some improvements in just the tightness that's going on in supply chains and the tough execution environment for construction projects and just the overall copper market. But these are options. you know, that we have. And so we don't have any kind of timeline to start it. We want to start it when it makes sense, when the market needs it. And so we have that flexibility within the portfolio to do that. But we're continuing the feasibility studies so that we can be in that position next year.

Great. Thank you.

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

Hi, thanks, operator. Hi, Kathleen. Hi, Richard. Thank you for taking my question. So my question relates to some of the operational and financial flexibility that you have. So if you think back to early 2016, you had $20 billion of debt, very little cash, had to issue equity, sold assets, not in a great position at that time to weather the storm of difficult markets, whereas today you have you have low net debt, you have high cash, your net debt is well below your target range, and you have multiple levers that you can pull in the event that macro conditions weaken further. So obviously the first lever, which looks like you're pulling already, is kind of suspending the buyback until things improve. But you still have a couple of billion dollars of kind of leeway on the balance sheet before you get into your net debt target range. Let's assume that commodity markets get worse and we're kind of stress testing the business and you're burning cash for the next kind of 12 months based on your current operational and spending plans. When you get into that targeted net debt range, what are the levers that you can pull next? Are there kind of capex reductions that you can make? Are there mines that you'll take offline? I mean, you know, the cost inflation is kind of prominent in the industry and copper price isn't really doing much. So eventually I would assume that some of these mines become loss making. So what are the levers that you can pull over time in the event that market conditions weaken further? And, you know, again, you probably have 12 months of leeway before you need to consider that. But where do you look next to kind of protect the balance sheet in the business?

Richard, I'll take that, and you can add to it. Or you'd like to go first?

No, no, Kathleen, go ahead.

Yeah. Chris, you know, historically what we've done, and, you know, we've got a really, really experienced team at this. Historically what we've done is looked at each mine individually and said, looked at opportunities to reduce costs, to keep mines cash flow positive during weak environments. And what's different right now, and I don't, you know, if we do get into recession, I think that we're going to start to see some of these historical correlations come more in line. But right now, we've got the copper prices have declined significantly. significantly, but input costs have not at this point. I think that if we do get into a really tough situation, our cost situation may get some relief. But in any case, what we do is we go through each mine, look at the operating plans, determine how we can optimize those operating plans. What it tends to mean is that we tend to look at where can we cut back on the mining rate to get to a better cash flow situation. We did that in 2020. We've certainly done it in 08-09. We did it in 15-16. We've done it multiple times. So if we get into the situation where we've got big surpluses building in copper, the world doesn't need our copper, we certainly have the playbook on how to address that. The difference now is that the world does seem to need our copper. So the inventories are very tight. We've been recovering from the 2020 downturn where we took down a lot of production, took down a lot of mining rates, and we're ramping back up. And it takes a long time to you know, get that flywheel going. So I don't think we're going to be very rash to, you know, cut mining rates and do what we need to do unless it's a very difficult situation. Now, what's different now than it was in 2020 is Grassberg is doing so well. And the match of having our Grassberg mine It really does provide very strong results, one of the lowest cost mines in the world. And so having that mine up and running and doing so well is a benefit. We've also got a very different balance sheet than we've had historically. But we're going to be smart about how we look at this. We're not going to produce at a loss. You know, if the world needs our copper, we need to have a margin. So we're going to do what we need to do. The levers that we have to pull are the same levers that we've had in the past. Big reductions in CapEx, probably the first thing. And then we'll start looking line by line on how to change the operating plans. But the difference, again, I just want to emphasize, you know, you look at the forecast for this, decarbonization, and the world appears to need more copper rather than less. And that copper demand is not sensitive to these economic movements. So we are agile, we're nimble, we'll do what we have to do, but I think it is different now than it has been in the past.

Thanks. There's no question about that. I mean, 2016 was a crisis for our company. We're not anywhere near a crisis now. And since then, we've had two major accomplishments that's de-risked our business significantly. One was the 218 agreement that we reached with the government to stabilize the situation we had in years about the structure of our taxes, royalties, and operating rights. And now we've had four years of operating under that and and and it's going very well as you can see by the presence visit etc and then as as kathleen mentioned de-risking grassberg by ramping up the underground and being so effective in sustaining the rates there we're going to be able to do that by continuing to operate effectively we've got this coaching layer ore body that we're developing that's an add-on to to give us stability And so we're back to the strategy that we've always had. Grassberg generates cash in any environment. It can fund our GNA. And then we challenge each of our other minds to manage their business to at least break even on a cash basis.

Thank you.

Your next question will come from the line of Alex Hacking with Citi. Please go ahead.

Yeah, thanks, Richard and Kathleen. Just a quick clarification on the leaching. If you are successful in getting to that 200 million pound rate by the end of next year, should we be then thinking about that adding on to the existing 4.2 billion pound guidance for 2024? Thank you.

Yeah, we'll give you... Definitely. I mean, the possibilities here are really exciting. And we don't want to get way out ahead of ourselves because it's still in the development mode. But with the sizable leaching operations we have already in place throughout our company, the ability to use this technology to add volumes is really exciting and could be meaningful. And then beyond that, we have historical leach stacks and conceivably using this technology to replace concentrator investments with some of our sulfide ore bodies. So it's really something we're using a number of different approaches, some proprietary, some in partnership with others. And we'll give you a report every quarter on how we're progressing with it and how we see it affecting our future. Okay, thanks.

Yeah, we've got about a third of that included in our numbers, Alex, and so there's certainly upside. And, you know, our team, we want to get to this initial target, but our team believes that with success there, we can scale it further. So, you know, for us, this is, in the near term, this is an area with low-cost units to America's business, and particularly in the U.S.

Okay, thanks. That's clear that one-third of it's already in the guidance. And then just on the cost side, I mean, your tone sounds like you're not really seeing any cost alleviation yet. You know, we have seen, you know, FX sort of moving in the right direction for you. You know, maybe headline energy prices come off a little bit, freight come off a little bit. How are you thinking about the cost environment as you head into 2023? Thank you very much.

Well, we were encouraged. Yeah, we were encouraged in the third quarter. Our equity costs were, you know, pretty close in line with what we had forecast going into the quarter. And sequentially from the fourth quarter. With the exception of coal, we've had very, very high coal prices in Indonesia, which continue to remain at way above historical levels. So some of the headline commodity prices have come down. We're encouraged by that. An area that we are seeing increases come through is more non-commodity, non-direct commodity, more indirect, where we're seeing the parts and equipment and other supplies that we purchase come in at higher costs with recession potential. That'll give us some leverage to push back on some of these things, but So the headline numbers, we have seen some relief in, but there's some other underlying areas where we're continuing to see price increases being passed through to us that we're continuing to manage as best we can. You're right about the currencies. That benefits us in... South America, Indonesia, and going into the quarter in terms of our guidance, you can see Cerro Verde wasn't that much different than our guidance. The main thing in Cerro Verde was the Mali issue that we had. But in the U.S., we don't get the benefit of the currencies. So as we look into 2023, at least right now for our forecast purposes, we're projecting what it is now. So hopefully if the markets turn weaker, we'll have some better ability to put costs down. But right now for forecasting purposes, we've essentially included what the current market environment is.

Okay, thank you. Best of luck with everything.

Your next question will come from the line of Matthew Murphy with Barclays. Please go ahead.

Hi. I'm wondering if you have any thoughts you can offer on what might lay ahead on the legislative agenda in the U.S. for the mining sector. There's been lots of talk on critical minerals and just a few murmurs on permitting changes or debate around the Mining Act. So I'm just wondering if there's any sort of big opportunities or threats out there in what might lay ahead.

Well, I mean, it's going to continue to be a matter of discussion, but practicalities affecting our business are that just a couple of facts. I think most of you know this. But we own virtually all of the lands and fee where we have mining operations. So we don't really pay royalties in the US. There was some impacts of the Inflation Reduction Act in terms of alternative minimum tax, and we're still sorting through those. there's a favorable federal tax rate. We have, uh, net operating loss carry forwards from our oil and gas deal. We have, uh, in our case, we have great relationships with, uh, with the states, which have the principal regulatory authority over our mine business and, and, uh, expansions, great community support where we operate, including the native American groups who, uh, want us to invest in hiring their people and working together so um there'll be a lot of lip service doing this we're not counting on any big government-based type incentives for us in the future we hope people get more reasonable in progressing permitting processes by investing in having resources available to deal with things effectively um but you know we continue to deal with the fact that politics are shorter run than our business is and we just have to see okay thanks richard your next question will come from the line of orrest walcott with scotia bank please go ahead

Hi, good morning, and thanks for taking my question. Obviously, we're hearing a lot out there about slowing demand, particularly in regions like Europe. Are you seeing any evidence of that from your customers? Are any customers scaling back orders at all?

No. In fact, in Europe, you saw the recent articles on premiums that are being suggested at very high levels. The inventories are low. uh there's uh there's you know the production out of russia is a complicating issue it's not a it it it's it's something at the margin freeport produces more copper than russia does but uh but but but that's a factor but uh um backwardation strong it's just striking to see that the price of copper It dropped 70 cents from a quarter a year ago, and yet the day-to-day business that we have is one where customers are really fighting to get product. We had something, I don't think it's ever happened, Kathleen or Mark Johnson's on the call, but we actually emptied all of our concentrate barns at Grassburg. I mean, they were empty. Generally, we have... operational issues with the shallow seas there getting production out so it's it's just striking how negative uh the financial markets are about this industry and yet the fiscal market is so tight it's um it's something that that we haven't seen now the reality is and Kathleen mentioned that is this historical correlation between our input cost and copper prices is disrupted right now. I think it'll come back into a more traditional relationship in the future, but it's not now. But we just don't see any, we certainly have no problem selling copper. In fact, we have problems meeting demand for, sometimes it's, you know, the rod market in the U.S. is disrupted. And so There's a shortage of copper rod in the U.S., but it's a real striking situation right now. That's great to hear. Thank you, Richard. I don't have any basis for predicting what's going to happen in the near term, but if this market turns, it's going to turn. It's going to turn with a vengeance.

I'm not predicting that, I'm just saying if... Your next question will come from the line of Carlos D'Alba with Morgan Stanley. Please go ahead.

Yeah, good morning, Rich and Kathleen. Thank you for taking my question. I would like to, if you could possibly discuss... Thanks, Rich. What is the outlook for cash taxes in the quarter? It seems that that was... still an important drag of cash. You gave the guidance for the fourth quarter for the income tax rate, but any comments on the cash front would be really useful.

Let's just go ahead and answer that. We have the issue. Our taxes we pay are based on our foreign operations. and particularly like in indonesia taxes we pay in any given year is based on the taxes we paid in the preceding year so when you have a situation like like we've had this year where the preceding year was a lot stronger financially we're paying higher cash taxes this year uh next year it'll it could well reverse but you know our our tax situation is is stabilized you know we're watching carefully what's going on in chile but that's more of an impact on our future development plans but we have stabilized taxes in indonesia and there's no question about the continuation of that and just in doing financial analysis you got to take into account this timing difference of when taxes are incurred and they're when they're actually paid uh And if you want details on that, call David Joint, and he can help you walk through those.

Perfect. And if I may squeeze just one more. In terms of the negotiations that you have started with the Indonesian government to potentially extend the current agreement beyond 2041, I presume it's still early on. But any color that you can provide, how those are going, and when it would be the earliest that you could get a resolution on that.

So we've had early discussions. And my sense is there's a recognition that it's in all parties' mutual interest to find a resolution for this. would make no sense for any stakeholder for us to run this operation with a drop-dead date of 2041. There's resources already identified beyond that. And for a number of years, because of all the protracted discussions we had about our contract of work and the new IUPK, we really haven't done delineation drilling to really understand what happens to these ore bodies at depth. And so the discussions are early on. There's some complications that we in the government will have to deal with with existing regulations and so forth. So it's not something we can say that there is anything other than early conversations. I've been pleased with the tone of those conversations. And now we're starting the hard work of saying, how do you get this done in a mutually acceptable way?

Carlos, I think one of the things that's a real positive, and we talked about the 2018 agreement earlier, but the fact now that the government, through MindID, owns 51% of PTFI, has increased the knowledge of this ore body and the recognition that it takes a very long time to identify and develop new sources of production. And so there's better recognition that we need to know sooner, earlier than five years before the exploration to be able to maximize the values. And so I think that's a real positive, that recognition that the long-term nature of this business and how it will benefit from, you know, having additional exploration development, you know, over the next 10 years instead of waiting until the end until it's too late. So that's a real positive of the 2018 agreement and alignment that we have with the government.

All right, great. Thank you very much, Kathleen and Richard. Yeah, that's a good point, Kathleen.

Our next question will come from the line of Michael Dudas with Vertical Research Partners. Please go ahead.

Hey, Michael. Good morning, Kathleen and Richard.

Michael.

Yeah, good morning.

So looking back towards, say, maybe pre-pandemic levels and if you're analyzing and doing feasibility study like you're doing for Baghdad or any other type of project, what do you estimate the increase in absolute dollar capital costs would be for a certain run of the mill or whatever type of project you'd have? And what do you think those operating costs would flow through higher? And the other aspect is, as you analyze risk rate adjusted return or return expectations, Have you changed them given where interest rate levels are and some of the political aspects, whether it's U.S.

or in South America?

You know, Michael, these projects are so different. You can't fit them in. And I know a lot of people who follow the industry at a high level are always trying to come up with some uh things like incentive prices and other things that that fit but every one of these projects are just so different and and there are different factors you know we we we will factor in the as as we conduct this feasibility study at baghdad and begin discuss and continue discussions with our board um We will factor in whatever the current price outlook is for capital and operating costs. We don't focus in on a particular copper price, but what does scenario copper prices look like and how does it fit into our overall portfolio? One thing that's come out of this, Kathleen made references to it a couple of times, but one thing that's come out of the pandemic is labor issues. And that's, as I talk with people, the Business Roundtable, Business Council, it cuts across industries, but it certainly affects our industry. And Baghdad is a very remote location. And we've got to make some investments to attract people to come there and develop sustainable labor force there but it's true in our other operations not so much overseas but in the us it's a real issue and that's a factor to consider in terms of committing capital and we've we've got a whole long future of potential capital projects in the us and there are a lot of in our view advantages for Freeport in having that. There's, you know, I mentioned the royalty situation, the great community support we have, the support from the tribal groups, and the long history that we've worked and invested so hard to have those positive relationships. And so we just have to, and I guess my point is, it's not something you can really generalize about, but you have to dig into each of these projects and and thoroughly understand uh how costs other factors figure figure into it so you know we got baghdad we got this lone star project that lies ahead in our future that's great um el abra is going to be a great project eventually so i wish i could give you some some some simplified answers for that but uh but there's clearly a mismatch

Michael, between current cost of a capital project and where the current copper price is. And that's what's guiding some of our thinking around timing of Baghdad is, you know, it's not something we have to do now. Let's wait to see how some of this unfolds and not try to force a project in the kind of environment we're in where the availability of people and equipment is tight. So this is really a project of bringing copper forward. If we don't produce it now, we'll produce it later. But we wanted the capital part of this project is important because you don't want to be building a project in an inflationary environment when you wait two years and it could be a different story. We can't, as Richard was saying, we can't predict exact timing, but we know we can be more efficient about doing a project in a different environment than where we sit today in the U.S.

You certainly highlighted the fact that the hurdle for the industry is much higher and certainly is going to exacerbate whatever supply-demand gap you anticipate going forward because of what you just enumerated. So I appreciate those thoughts. Thank you.

Well, that is a real point. I mean, this industry-faced supply gap challenges before this current inflationary environment we have those had to do when i look back on the almost 20 years now i've been ceo you know you have you have geology factors where today's opportunities for supply expansion just are are much less attractive than they were 20 years ago and then you got these geopolitical factors that crop up at different places around the world and and the fact that so many new deposits are underground etc etc but now this current situation we're going through right now with the uncertainties about the relationship between input cost and prices about the availability of material supply supply chain issues about labor issues particularly in the u.s all those things are just adding to the supply barriers for the industry. And yet we have this new era of demand that's coming to play. And absent some just global calamity on whatever basis it is, I'm just so increasingly confident about what the outlook for the commodity is going to be and just how strongly our company's position to benefit from that outlook. And that's what we want to preserve. That's why we're going to be conservative about spending capital, about financial policy, because if anything, this company has seen the damage that can be occurred if you don't approach it in a commodity environment like we have, or industry like we have, in a conservative, solid way. And so that's what you hear over and over as we talk about how we're dealing with the current environment and positioning ourselves for a positive future.

Thank you, Richard. Thank you, Kathleen.

Our next question will come from the line of Martin Malloy with Johnson Rice. Please go ahead.

Good morning. Thank you for taking my question. Assuming that the current copper pricing environment and financing environment continues here, From an industry standpoint, when do you think it'll start to impact, um, in terms of deferment of projects, et cetera, the, the industry supply?

Well, you know, the current environment's adding to it, but clearly the uncertainties that emerged over this past year plus time in Latin America, you know, 40% of the world's copper comes from Chile and Peru. And with what went on in their most recent presidential elections, the uncertainties that came out from that and things continue to change, uh, you know, in, in, in Peru, the government has been in turmoil. I mean, the number of ministers that have gone through this administration is just striking. And then, then, then, then Chile had the situation of where there was a negative vote on their proposed constitutional amendment, which changed the the targets there. You can see what's happening to greenfield projects being delayed in the United States, even though there seems to be lip service saying that the world needs copper, but that's not changing so much for greenfield projects here and Africa's Africa. It's just a world of where all of this is happening. We do have an industry where there's two or three projects that have been in the works for many years now. They're going to come on stream shortly. But when you get past those, you just see everything's dried up and you don't see companies talking about having, you're hearing more about like you're hearing from Freeport. We're being conservative about Baghdad. We'll be conservative about El Abro. you know, conservative about our opportunities at Lone Star. And the surpluses that were predicted two or three years ago are being downgraded as companies downgrade their current production estimates.

So it's going to happen quickly, you know, in the next three years, and it could be shorter. Thank you. Your next question will come from the line.

I see some real similarities to what we've seen in the crude oil business for years of underinvestment, and then all of a sudden something happens, and now the world's had a crisis in the oil industry.

Our final question will come from the line of Brian McArthur with Raymond James. Please go ahead.

Good morning. Good morning. Most of my questions been answered, but can I just ask, um, I'll ever had a very good quarter, 60 million pounds. That's probably the best in like years. Is that sustainable now? Or was something different happening that this quarter there?

No, I mean, we've been flagging that, you know, we cut Elabra's stacking rate during 2020 and have been ramping back up to get an increase. And so we've been flagging the, and we're moving to a new leach pad there. So that's in line with what we've been guiding to.

So we're back. We're now on that new steady run rate of 240, 50 million pounds a year.

Right.

Yeah. You touch on an important point, you know, and we certainly saw this with the crisis steps we took years ago in 2016. And this sort of ties into the question about what are you going to do with some of these lower grade deposits? You know, the If you make decisions about mine rates, they have long-term consequences. It takes a while if you cut back stacking rates on some of these mines. That's not a production impact just for this year, but extends for years in the future. as we take steps to build it back up, then that's going to be incremental over a period of time. And so I just keep harping the people who try, you know, talking about our business. It's a long, long-term business. And that just comes to play in almost everything we do.

Great, thank you. I knew it was coming back up. It just was a pretty big jump all of a sudden. So I just was curious whether everything had been done there to go to that new rate. So thank you very much.

Yep. OK. Thanks, Ryan. Thanks, everybody. We really appreciate you being on the call and encourage you to follow up if you have further questions. And we look forward to reporting reporting on our our company and our industry in the future so thanks for for joining us ladies and gentlemen that concludes our call for today thank you for your participation you may now disconnect