Freeport-McMoRan Inc.
Q4 2019 Earnings Call Transcript

Published: 23 Jan 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Fourth Quarter Earnings 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, Executive Vice President and Chief Financial Officer. Please go ahead, ma'am.

[Kathleen Quirk:]

Thank you, and welcome to the Freeport-McMoRan fourth quarter 2019 earnings conference call. Our results were released earlier this morning and a copy of the press release and slides for today's call are available on our website at 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. We’d like to refer everyone to the cautionary language included in our press release and presentation materials and to the Risk Factors described in our Form 10-K. Also, on the call with me today are Richard Adkerson, Red Conger, Mark Johnson and Mike Kendrick. I'll start by briefly summarizing our financial results and then will turn the call over to Richard who will review our recent performance and outlook. As usual, after our remarks, we'll open up the call for questions. Today, FCX reported net income attributable to common stock of $9 million for the fourth quarter of 2019. After adjusting for net charges of $22 million or $0.02 per share, which primarily reflected net charges at PT-FI, mostly related to historical contested tax audits, metals inventory adjustments and partly offset by gains on asset sales, the adjusted net income attributable to common stock totaled $31 million or $0.02 a share in the fourth quarter of 2019. For details about the special charges, please refer to schedule VII, Roman numeral seven in our press release. Adjusted earnings before interest, taxes and depreciation and amortization for the fourth quarter, EBITDA totaled $891 million. We also have a reconciliation of EBITDA available on page 35 of the presentation materials. Fourth quarter copper sales totaled 906 million pounds. Those were higher than our October estimate of 870 million pounds. And gold sales of 317,000 ounces in the fourth quarter were 117,000 ounces higher than our October estimate of 200,000 ounces. The positive variance to guidance of our copper and gold was primarily associated with an expansion of mining from the Grasberg open pit, which was completed in the fourth quarter and also the timing of shipments as we sold some inventory from the third quarter.

[Richard Adkerson:]

Thank you, Kathleen, and good morning, and thank each of you for participating in today's call. We at Freeport had an excellent fourth quarter, doing what we set out to do. During this period of time, execution is our battle call, and that's exactly what we did. We executed. We have strong momentum on three important initiatives to expand margins and cash flows and increase values for shareholders. Looking back on the year 2019, we set a strong foundation for the long term and positioned our Company for profitable growth for years to come. We start with the first and most impactful initiatives, and that is our underground ramp-up at Grasberg, which I'm pleased to report is accelerating as planned. During the fourth quarter, we completed surface mining at the Grasberg open pit. And now, we are entirely focused on establishing large-scale production from our massive low-cost and long-lived underground ore bodies. And that's going to be a source for significant cash flows for 20-plus years to come. We benefit from the substantial development and infrastructure that is already being completed. The strength of our team which possesses necessary technical competences, experiences and motivation to successfully execute our plan, and that's what they're doing. Positive production results in 2019 is enhancing our previously existing confidence of our ramp-up schedule. And we’ve talked before, we're in a show me stage for ourselves and for our investors, and that's what we've done. We're showing people that we're doing what we said out to do. The designs of the Grasberg Block Cave and the Deep MLZ mine are world class. We are using our mining experience that we've had over our 40-year history of underground mining to enhance infrastructure construction. We're using new technology autonomous loaders and remote control equipment. We've made advances in ground support techniques, undercut blasting and cave management. And we're going to continue to take advantage of these improved technologies as we go forward. Technology advances in underground mining are more impactful and more achievable than open pit mining, simply because the nature of the processes. We were successful in meeting or exceeding important milestones during the year, and I'll review that in more detail in a moment.

[Kathleen Quirk:]

Thank you, Richard. And I'm going to start on slide 13 and take you through how all these initiatives translate into improving cash flow and value for our shareholders. We summarized on slide 13 our consolidated sales outlook for the period 2020 through 2022. And you can see here the 30% growth in copper sales between 2019 and 2021 that Richard referred to previously. This equates to an increase of about 1 billion pounds of copper, which results in incremental revenues, totaling $2.8 billion at today's copper price. The growth volumes that are coming in -- the growth volumes that are coming in are at a very-low incremental cost, which result in a sizable increase in our EBITDA and cash flows, as you will see modeled, in a moment. For 2020, we're projecting 3.5 billion pounds of copper sales, that's in line with our previous estimates. The increase of 200 million pounds between 2019 and 2020 primarily reflects increases in North America and Indonesia, partly offset by lower grades of South America. In 2021, we're projecting sales of 4.3 billion pounds of copper as output in Indonesia returns to more historical levels. And we’ve also included a projected benefit of an incremental 100 million pounds of copper in 2021 and 200 million pounds of copper in 2022 associated with the Americas innovation and productivity initiatives that Red is leading and Richard talked about a few minutes ago. We show 2022 volumes growing to 4.6 billion pounds of copper. For gold, we also expect sales to rise as we ramp up the underground at Grasberg. As we talk about our sales in 2019, exceeded -- our gold sales exceeded our forecast and in the fourth quarter were about 100,000 ounces higher than what we expected going into the quarter. For the outlook, we made some model revisions in our latest forecast. But the estimates are pretty close to our previous estimates with gold volume forecasted 800,000 ounces in 2020, growing to 1.4 million ounces in 2021 and 1.7 million ounces in 2020. Sales of molybdenum are expected to be in the 90 million pound range as we go forward. But, we do have additional capacity that we can produce if conditions warrant. Moving to the next slide. On slide 14 we show our projected 2020 volumes by quarter for your reference. With the underground ramp-up at Grasberg, the sales are expected to increase throughout the year. And by the fourth quarter, you’ll see we expect to be at an annual run rate, approaching 4 billion pounds, which is well on our way to the 4.3 billion pounds target that we expect to achieve in 2021. Our slide on page 15 illustrates that our growing production profile is coming in at lower incremental cost. And that will drive our unit cost down as we go forward. For 2019, our average net unit cash cost net of byproduct credits was $1.74 per pound. We're projecting a similar level in 2020 for the average, and that reflects a lower top-line unit net site production cost in 2020, but it’s offset by lower unit byproduct credits. We're assuming in these estimates $10 a pound for moly. Moly prices did decline some in the fourth quarter and are currently around the $10 level. But, there's a $0.03 per pound impact for each $2 change in molybdenum for 2020. As we move to 2021 because we are ramping up production, the unit cash costs are expected to decline by 25% from the 2019 and 2020 averages, and that's just a function of scale at Grasberg. We expect that at full rate, the underground operations in Indonesia will be among the lowest in the world. And the innovation and productivity initiatives in the Americas is also expected to deliver lower incremental costs than our average. So, we're very focused on bringing the unit costs down as we build scale and productivity in the operations. On slide 16, we show a modeled result of our EBITDA and cash flows at various prices, copper prices. We’re holding gold flat in these models are at $1,500, and molybdenum flat at $10 a pound over this period. In 2019, our EBITDA totaled about $2.7 billion, and that was at an average copper price of $2.73 per pound. For 2020, we're estimating EBITDA would range between $3 billion and $5 billion at copper prices between $2.75 and $3.25. And notably, and this is this is where the leverage of the increased volumes come in at -- the average of 2021 and 2022, EBITDA would grow to $6.5 billion to $8.5 billion, using the same price range. So, when we look at 2021 and 2022, we go from $2.7 billion in EBITDA in 2019 to over $6.5 billion in 2021 and 2022 at current prices. This is all from existing projects that are in advanced stage. As we've been emphasizing, it's about execution. Over the next few quarters, achieving our key milestones will continue to derisk the plan. We have a similar story for operating cash flows net of our cash taxes and interest. Our operating cash flows grow from $1.5 billion in 2019 and would range from over $4 billion to $6 billion in 2021, and 2022, with copper prices ranging from current levels to $3.25 per pound. As our cash flow grows, we're going to be very-disciplined about capital spending to target increase returns to shareholders as we complete the transition at Grasberg. Slide 17 shows our capital expenditures for 2019 and projected spend for 2020 and 2021. Capital expenditures totaled $2.65 billion for 2019 and are expected to total $2.8 billion in 2020. We've included about $150 million in capital investments in 2020, associated with our innovation and productivity project. That has a very quick payback and will add long-term value. We’ve added 100 million pounds of copper in 2021 and 200 million pounds in 2022. So, you can see the quick payback of those projects. And I think it's going to build the foundation of improved long-term value of our Americas businesses as we go forward. The balance of capital in 2020 includes $1.3 billion in underground capital spending at Grasberg and the completion of the Lone Star project. We’ve also got sustaining capital in $1 billion range. For 2021, we expect capital to decline by about $400 million, and we’ve included $1.2 billion in sustaining capital and the balance for projects, mostly related to Grasberg. I will note that the underground capital at Grasberg is expected to decline significantly beginning in 2020. As Richard mentioned, we've got a big part of the infrastructure completed. And so, we do see capital beginning to decline significantly from Indonesia, beginning in 2022 and beyond. We're continuing to manage our capital expenditures very carefully and thoughtfully. The investments we are making now are in advanced stage. They're going to strengthen our margins at low prices and enhance our long-term asset base, while providing leverage to improve markets over time. The amounts do not include the new smelter in Indonesia in which FCX will share a 49% of the economics. We've got some information on the smelter on the next slide on slide 18, the status update of where we stand. We're in the process of completing our engineering studies and expect to have confirmed project costs and project schedules during 2020. The preliminary capital cost estimate on 100% basis approximates $3 billion for this project with capital estimated to be in the $500 million range for 2020. We're in the process of making the necessary improvements to the ground at the land side in East Java, Indonesia. We’ve also made very good progress on our financing discussions. They're at an advanced stage with a syndicate of banks. And we expect the bank facility will be available during 2020 to fund the capital over time as it’s required. We are planning for the financing to be made at PT-FI without recourse to FCX, and for the new facility to be drawn as needed to offset cash outlays for smelter. So, we do not expect the dividends out of PT-FI to be burdened by smelter development capital during the construction period. We've included a chart at the bottom of this slide to show the after tax costs of the debt service. And you will see here that in this example we show an amortization of the capital cost spread over the life of the existing reserves. The initial financing will be shorter term but can be financed -- refinanced. And this illustrates what the cost of it is over the remaining 20-plus-year life of reserve. But, the net impact on FCX's equity share is about $88 million per year. We're also showing here that as part of the smelter development, we will be phasing out the export duty that PT-FI currently pays. It's currently 5%. And as that is phased out, the savings average over the life of the mine is a similar amount of almost $80 million. So, we've got the cost here but also the benefit of reducing the -- phasing out the export duty. We also will have the benefit of having operating costs at the smelter, which should be very competitive compared to global TC and RC markets. Turning to slide 19. We're just summarizing here where we are from a debt position, net debt position. We ended 2019 with just below $8 billion in net debt. We've got a strong balance sheet, good liquidity position. We have $2 billion in cash and an undrawn credit facility. So, strong liquidity, and we do not have significant maturities until 2022. And in closing, before we take your questions, we just want to reiterate where we are in terms of establishing the necessary production we need to grow our revenues and cash flows. We're very positive about the financial outlook. The initiatives that we have in place are advancing in line with the expectations. And we're focused on continuing to hit the milestones in 2020, executing effectively and delivering on these plans. So, those will all translate into substantial growth and revenues, margins, and free cash flows, as we go forward. So, we appreciate the attention. And now, operator, we’d like to open the call for questions.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line and Alex Hacking with Citi.

[Alex Hacking:]

Good morning, Richard and Kathleen. And thanks for the question. I have a couple of questions on South America, if that's okay. Firstly, on Cerro Verde, it looks like costs will be going up this year. Is that primarily due to the grade decline? And how should we think about that going forward? I think, you're mining around 0.35% today, which I think is around wherever reserve grade is. So, how should we think about that going forward? Second question, your JV partner El Abra, Codelco has announced cuts to their CapEx budgets going forward? Does that affect El Abra in any way or you're thinking about the future of El Abra? Thank you.

[Kathleen Quirk:]

Thanks, Alex. It's Kathleen. The grades in Cerro Verde were about 0.36 in 2019. We're expecting that to be about 0.33 in 2020 and are not expecting in the near term further decline. But, what we are doing is ramping up the concentrator there. We've got -- it's already producing 10% above where it was originally designed. But, Red and the team have identified opportunities to increase the concentrating rating rate to 420,000 tons a day, and that would be the biggest concentrator in the world. We expect that to start coming in, in 2021. So, we've got relatively flat grades at 0.33%, but very large scale. And these efficiency initiatives are going to help Cerro Verde, the ones that Richard was referring to about the mine-related initiatives, the CHLOE project that's being piloted at Cerro Verde. So, we're really positive about Cerro Verde to continue to try to improve efficiency of its mining rate to see the big mill that it has there. On El Abra, we're not anticipating any changes with the partnership we have with Codelco, we work very closely with them on the expansion opportunities. At El Abra, we're really focused on continuing to optimize what we have. We're currently looking at the evaluating expansion project but not looking to pull any trigger on that right now. So, we have substantial time with the existing operations to consider what's next. I don't know Red, do you want to add anything on Cerro Verde, or…

[Red Conger:]

So, let me just say, with El Abra, we are working cooperatively with Codelco on it. They're encouraging us to work on it. We're not planning on initiating major new expansion projects, until we complete this process of the underground conversion at Grasberg. And so, we're studying it now along with expansion at Bagdad and others. And we'll be doing tradeoffs to see what makes sense when the time comes to make decisions on expansion. So, we think that if it does come down to a joint decision to expand El Abra that there'll be sources of capital to finance it. So, I don't think that's going to be a constraint to us. But that's a future decision to be made.

[Operator:]

Your next question comes from the line is Carlos de Alba with Morgan Stanley.

[Carlos de Alba:]

So, just in terms of the smelter financing in Indonesia, Kathleen. Have you been facing any pushbacks, or what obstacles are you getting from the conversations with the banks? When do you really think during this year that you can grab this issue for good, so your Company can move on and investors can feel more confident where the money is going to come from and at what rate? And then, if I may ask Richard or Kathleen, do you have an early sense of the potential CapEx estimate for the oxide expansion Lone Star, and when do you think you can be ready to make a decision? Thank you.

[Kathleen Quirk:]

Carlos, the answer to your first question is, we are in an advanced stage of discussions with them, with a group of banks we have been for several months. We are very close to having $3 billion in commitments raised. And so, we do expect the facility to be in place in time for the -- to fund the capital. We don't -- we haven't been spending that much capital on it. Most of the work to-date has been on ground improvements and we’re doing the engineering studies right now, so. But, we do expect that the bank facility will be in place in 2020 ahead of when it’s needed to fund the $500 million that we're talking about estimate for 2020. There really hasn't been pushback. There is strong interest in PT Freeport Indonesia. It does -- Freeport PT-FI, does not have existing debt. The banks like the strong sponsorship of our partner Inalum and FCX. And so, there hasn't been pushback on it.

[Richard Adkerson:]

Yes. To say -- it’s contrary to push back. There is a very positive reception in the banking community participating this. So, it’s -- and you know, it’s because as Kathleen says, PT-FI has no debt. The banks like to do business with Freeport. They like to do business with Inalum. They like to do business with government of Indonesia. So, we have a positive reception for that. With respect to Lone Star, we are focused right now in getting this initial project up and running. As I said, production commences this year, and we're analyzing exploration data to make decisions on where to go from that. So, it’s a work in progress on the future right now, both for an oxide expansion, and ultimately, I'm confident we'll do a sulfide project there. But that's all work in progress.

[Kathleen Quirk:]

But, there is a capacity at Safford, in the tankhouse there to do more than 200. And so, there could be some low capital mining equipment related things to raise the production at Lone Star. So, incremental expansions I think will come in at a very cheap capital cost. So, we have some flexibility there.

[Operator:]

Your next question comes from the line of Lucas Pipes with B. Riely FBR.

[Lucas Pipe:]

Hey. Good morning, everyone.

[Richard Adkerson:]

Hey, Lucas.

[Lucas Pipe:]

I wanted to take a closer look at 2022 production. So, on slide 13, you show a growth through 2022 and there's about 300 million pounds of growth versus -- in 2022 versus 2021 and then you have 200 million pounds from the efficiency drive, and then on slide 31 you show also 300 million pounds of growth from Indonesia. So, in short, should we be thinking about the efficiency drive offsetting depletion? And if so, where would we be seeing that depletion in 2022? Thank you.

[Kathleen Quirk:]

It just varies, Lucas. We’ve got some higher grades in 2021 than we have in 2022. So, it’s not necessarily depletion. It's just we do have some variability in grades, principally in North America. So, 2021, we benefit from having some higher grades, compared to 2020 and 2022. But, most of the growth is coming from Indonesia that year. But, we've also been able to offset this lower grade in 2022 with the efficiency impacts.

[Lucas Pipe:]

That's helpful. Thank you for that. And then, I wanted to ask about kind of the CapEx outlook, past 2021. I think, you mentioned in your prepared remarks Kathleen that Indonesian spending should be dropping substantially. But, can you elaborate what would be kind of a ballpark for the two major buckets with mining and then major projects beyond 2021, specifically. Thank you.

[Kathleen Quirk:]

I think we mentioned the Indonesia development capital for underground averaging about $1 billion a year. In 2020, it’s a bit higher than that. But, by 2022, it's well below that average, probably half that average and then starts to decline as we go forward. So, that's when you see the capital really falling off is after 2022. We have projected very low capital for underground development. We've obviously invested a lot in the past. But that's -- we're at the peak now and it's declining.

[Operator:]

Your next question comes from the line of Matthew Korn with Goldman Sachs.

[Matthew Korn:]

Hey. Good morning, everyone. I just want to say, as it's been through the years, it's been great to see the progress made at Grasberg. I appreciate the work gone into that. Couple questions for me, just in the near term. Expectations for the first quarter reflect a pretty big step back in production, step up in per pound costs. Essentially, is that due to this being the first quarter where you're completely out of the open pit? And then second, Kathleen, I wanted to ask a little bit more on just the accounting for the smelter, as this comes through over the course of the year. Just to make sure. The debt’s going to be consulted in the balance sheet. I expect the total 100% spending for the smelter come through on your cash flow statement. But, can you help us out with some of the other pieces or the other offsets that would reflect your partner's participation there? That would be very helpful. Thanks.

[Kathleen Quirk:]

Okay. In terms of the first item, the production for the first quarter, you're right about that, Matt, the main difference is the Grasberg. We don't have the open pit any longer. So, that's the biggest impact on the first quarter. We also do have some variances at Cerro Verde already, primarily in our estimates for the first quarter. And for South America, the first quarter is the lowest for the year, based on our current mine plan. So, really, first quarter for all sites is low, but ramping up during the year. And it's just mine planning as usual. We'll try to produce as much as we can that fits within the overall mine plan. On the smelter, you are correct that it is consolidated. You'll see it in our consolidated results in capital expenditures, when it will be in our consolidated debt. And what we tried to do on slide 16 is to let you understand really what the economic impact is. It'll be financed at the PT-FI level. So, we won't have -- FCX will not have cash to put in for the smelter, nor will our partner. It'll be financed at the PT-FI level. And so, really, the impact that FCX will see from an economic standpoint is the effect on dividends coming out of PT-FI. And what we're showing here is really with the benefit of having the export duty phased out, and that'll offset essentially the debt service. So, that's really the economic impact. But, when you look at the financial statements, it will be in the consolidated results. But, we want to focus on what the true economics are.

[Richard Adkerson:]

So, Matthew, you've touched on a important point that I think everybody understands. But, just to make sure there’s an understanding, our new structure with Inalum, the state owned company in Indonesia differs from where we were with our previous partner, Rio Tinto, as Rio Tinto is a joint venture interest. Now, there's the entity PT-FI, which has two shareholders, Inalum 51%, FCX 49%, but it's the entity PT-FI that will be building the smelter that’s doing the financing at the entity level. And while PT-FI -- FCX only owns 49% of the economics, that's close to the economic interest we had under the Rio Tinto structure. So, that's why we're very happy about it. Through a shareholders' agreement, FCX retains operating control over the operations. So, it's just important to understand that -- if there had been equity requirements of shareholders, that would have been made 51-49. But we concluded that the availability of this low cost bank financing is so attractive that that's the best way to finance this. And as Kathleen says, when you look through it and the fact that the export duty is going away, there's not really a lot of difference, plus there's going to be some impact of having an incremental major smelter in the world on global PCs and RCs, which will be beneficial to the rest of our business.

[Operator:]

Your next question comes from the line of Matthew Murphy with Barclays.

[Matthew Murphy:]

Hi. Kathleen, I had a question on the slide 16. If I look at 2020 operating cash flow, let's say the $2.75 per pound scenario, and I compare that to your presentation from Q3, the drop looks a little more than just the byproduct assumptions. So, I'm wondering has anything else changed in the expectations? You said top line production costs would be down. But, are they down less than you expected at Q3 or anything else that can explain that change?

[Kathleen Quirk:]

The big differences between last quarter's forecast and this one is we made a change in molybdenum you noted that from $12 to $10. We also have incorporated our new mine plans and some of the studies we're doing that are expensed in our -- for the innovation projects, and then, just some changes in timing on tax payments. So, nothing really major, beyond those changes in assumptions.

[Operator:]

Your next question comes from the line of Chris Terry with Deutsche Bank.

[Chris Terry:]

Hi, Richard and Kathleen. Thanks for taking my questions. Two for me. First one just on cash flow and thinking about other ways you can reduce your net debt further. Just wondered if you could touch on working capital over the next 12 months or so. And then also, you’ve done a good job on the asset sales in 4Q. Just wondered if there is any other assets in the portfolio, JVs et cetera where you can monetize some of the rest of the portfolio that we might be missing. That’s my first question. Thanks.

[Kathleen Quirk:]

Yes. Thanks, Chris. And I think you saw we did complete some asset sales in the fourth quarter and we’ve got some additional potential transactions that we’ll continue to look at, if they make sense economically, where we do have some non-core assets that are not producing that potentially could be monetized for cash. So, we’ll continue to look at that if we can do at a valuation that is positive for our shareholders. Continuing to work on reducing working capital at -- all of our teams and Red's team continue to look at our supply chain and how we can gain better efficiencies of using supplies that we already have across the organization to share those resources. During the fourth quarter, you could see we did bring down our sales concentrate and finished goods and inventory. We’ll continue to try to focus on doing that. But that's an area of focus as all of us are focused on this transition period and really trying to conserve cash as much as possible, so that as we go into the improved, we can be in a position to begin returning more cash to shareholders.

[Chris Terry:]

Okay. Thanks a lot. And then, my other question just relates to CapEx as well. I know you've gone through that on number of the other questions. But, I just wanted to touch on -- so the smelter totaled $3.5 billion in 2020. Would we expect sort of an even split of 800 roughly for the other three years to go at 2023?

[Kathleen Quirk:]

We're in the process of getting final engineering done and project schedules. So, we don't have at this point an exact estimate of capital cost. I would expect just based on our preliminary estimates that the capital in 2020, one would be slightly above the average you just talked about and in 2023 be slightly below. I think most of the capital will be spread between 2021 and 2022. But that's I think for your modeling purposes, which you have is probably pretty close.

[Chris Terry:]

Okay, thanks. And then, just as well on CapEx for 2020, your guidance was 2.6, gone to 2.8. Is that just a timing issue against 2021, 2022 or is there something that moved there in terms of the buckets? Thanks.

[Kathleen Quirk:]

Well, most of the increase, we’ve got $150 million in our 2020 plan for this productivity initiative, which is adding 100 million pounds of copper in 2021 and 200 million in 2022. So, when you look at the CapEx, you’ll also have to consider how much production we're adding in the near term. So, it's got a very quick payback.

[Operator:]

Your next question comes from the line of Orest Wowkodaw with Scotiabank.

[Orest Wowkodaw:]

Hi. Good morning. I just wanted to again return back to unit costs. I've been a bit surprised about just the upward trend that we've seen in both North America, South America. And in your guidance of I guess about 130 a pound for 2021, does that assume that unit costs continue kind of in North America, South America around that $1.90 to $2 mark.

[Kathleen Quirk:]

We do show some slight benefit in that period in North and South America, beginning in 2021. The one thing that -- just to keep in mind that we've been doing in recent years is increasing our mining rate, which is going to set us up for better production, more flexible production in the future. And so, what you’ve seen in 2018-2019 is a big increase in our mining rate from where we took it down after the market change in 2016. So, we've been building back the mining rate. That's going to give us better long-term value and more consistent performance as we go forward. But, we're not projecting increases like we've had in recent years. And in fact, these productivity initiatives, the volumes are coming in at lower incremental costs. So, we do expect to have that trend reversed as we look into 2021.

[Orest Wowkodaw:]

Okay. And longer term, I mean assuming grades only decline in the future or stay flat at best, are we -- should we anticipate the North America, South America costs are going to be, I don't know, somewhere in the $1.80 range?

[Kathleen Quirk:]

Yes. I mean, that's part of the reason we are aggressively moving on these initiatives is we are very focused on maintaining of cost position, despite the fact that you have longer hauls and changes in grades over time. So, that's really what we're focused on is how do we offset -- more than offset inflation and these other factors that affect not only our mines, but mines across the industry that have different profiles as they mature.

[Orest Wowkodaw:]

Okay. And then, finally, just on the Q1 production -- sales guidance of 725 million pounds. Can you tell us what the Grasberg copper is, embedded in that number?

[Kathleen Quirk:]

It's about 115, 120 million pounds.

[Orest Wowkodaw:]

Okay. So, that would imply there's quite a step down in North America, South America than in Q1?

[Kathleen Quirk:]

From the fourth quarter. Yes. I think, I mentioned that because we also had -- we've got lower production in the first quarter, we also had some sales timing, you’ll recall that boosted fourth quarter sales versus the production in the fourth quarter.

[Operator:]

Your next question comes from the line of Chris LaFemina with Jefferies.

[Chris LaFemina:]

Just on Grasberg, the operational progress with the Black Cave and the Deep MLZ has been very impressive over the last few quarters. And in fact, the Deep MLZ, I think you're tracking well ahead of where you had expected. If you think about the -- well, I guess, there is a lot of scale and complexity to these projects, a lot of moving parts. But in terms of the risks now going forward, do you feel like most of the risk in those projects is largely behind us, and you have a very high level of confidence around the ramp-up there? And what really are the key risks going forward now? I mean, the caving is working, the hydraulic fracing is working. Is it just a matter of making these things bigger and ramping them up or are there any other kind of critical tasks that you need to get through before you can confidently say that we've achieved success with these projects?

[Richard Adkerson:]

So, I think I did say that when you step back and look at where we were, as we were looking forward for this -- and we've been looking forward to this ever since mid 90s, when we developed the plans for the open fit design in the Grasberg pit. I mean, we were thinking about where to go, and over time, the recourse just got bigger and bigger and bigger. The big issue for us was developing this infrastructure, and that is largely behind us. I mean, we've got some crushers to complete that we're constructing out, some power, looking at a mill improvement. But, the fundamental impact -- we’re developing some visuals. If you could see this thing, it is incredible. I mean, the sheer size of the adits and the crushers in this ore train, and all of these things. That was a real big risk thing going into this. And that's essentially behind this. Now, we're opening up these drawbells and propagating case. And it's done in sections. And so, each one of those are of a scale that's not larger than what we've done in the past in mining the DOZ, the IOZ, DOZ and so forth. So, there's ongoing things to deal with. There'll be different kinds of ground conditions we have to face. But, what's going to be so great about this is that we will have flexibility in going from one of these faces to another as we deal with it. So, mining always has its risk and I don't want anyone to sit here and say that we don't. But, I got to tell you the big risk associated with this underground development, in my opinion, Mark, I think you'll agree with this, right, are behind us. So, it's now a question, it's more of an operating thing now, it’s more of operations. And that's what we've been so good at over time.

[Mark Johnson:]

So, one thing I'd add there too just -- this is Mark Johnson, is there's nothing unique with the equipment we're adding, it's more of the same. Our manpower levels at the underground stay flat. So, we kind of transition people from development roles into operating roles. So, from a training and recruiting standpoint, we're well-positioned right now. So, as Richard said, it's more of the same. These mine areas are opening up. It's much like a pushback in open pit. As add pushbacks, you have more work areas. We are adding more production blocks, more cave fronts. And it just provides that room for all the additional drawbell construction. So, in Deep MLZ, still the seismicity is something we watch very closely. With the hydrofracking area, all the tools that we’ve acquired are mitigating those quite well. We're very confident there. We're well-positioned to be able to continue to do that. It's going to be one of our units of operations throughout the Deep MLZ. In GBC, it's just -- as Kathleen has mentioned before, it’s the same ore-body. The grades are trending well, mine grades relative to what we thought. So, yes, we believe we -- every month, every quarter, we're getting better positioned. Much of those risks, much of the challenges are behind us.

[Richard Adkerson:]

And you know there is another factor that as I think about it in response to your question, our labor situation right now is so much better than it has been since 2011 or 2012. I mean, the team is motivated, everybody is working together, relationships with the union is good. Our relationships with the government is much, much improved. And so, there were a lot of these issues that had an impact over time in what we were doing. When we had strikes and blockages and all those sort, that's not part of our situation now, and we don't anticipate it being part of the situation going forward. So, just a lot -- we just all have this great thing about the way things are going here and it's a lot of things coming together, getting this work done, but also selling down with the government, developing good relationships with the workforce. Security situation has been good, although security in Papua will continue be a concern of the government. But in our area, security has been good. And so, we're just moving along and it’s moving in a very positive direction.

[Chris LaFemina:]

Well, congratulations on the progress. Sounds like a good time for a site visit?

[Richard Adkerson:]

Yes. We are looking forward to it. We are looking forward to it. And I think there have been things that kept us from doing that in the past but we are -- nobody goes to that place and comes away from it, with the same feeling. I was visiting with JS in London LME week. And even though they're out of it, he just kept talking over and over about what a fabulous operation it is and engineering accomplishments. So, it’s -- we look forward to giving you a chance to see it.

[Chris LaFemina:]

Thank you.

[Operator:]

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

[John Tumazos:]

Thank you very much. I'm looking at the slide nine on Lone Star and I just want to make sure I comprehend it. There were 68 holes, I guess in the upper row that averaged intercepts 0.56 copper. Were those the holes prior to 2019, and were the 28 holes that averaged 0.82%, the 2019 holes?

[Richard Adkerson:]

They're not divided that way, John. They're just shown for illustrative purposes, as we got the data in. So...

[Kathleen Quirk:]

To show the number of holes where we have the higher grade intercepts.

[John Tumazos:]

So…

[Red Conger:]

And some of those intercepts wouldn't be inside of ultimate pits, even at this point at pits that are drawn at today's copper prices, $2.50 copper prices. So, they're not -- these are just the size of the mineral endowment there's what we're trying to show.

[John Tumazos:]

Presumably the high grade stuff is into it?

[Red Conger:]

We're going to see. As Richard pointed out, we're building the mineral models, we're going to float columns and do all of that analysis.

[Richard Adkerson:]

So John, we had some historical drilling there. And we were able to use even before 2015, I mean, this ore-body has an exploration target for many, many years. And so, we upgraded the drilling. We initially did enough to take advantage of the available facilities at Safford as it was winding down. So, the first project was how can we use these facilities at Safford. We continue to drill. And as we continue to drill, some of it is outside of that planned current production. We're finding very attractive opportunities, which we are now analyzing. And those opportunities include oxide, as Kathleen said there's a possibility of being able to further use Safford. There may be an opportunity to do other capital investment to take advantage of that resource. And then, we continue to develop the sulfide. So, this is very much an unfolding story. But, as it does unfold, the exploration use continues to be very positive.

[John Tumazos:]

What grade does the 200 million pound production plan assume?

[Red Conger:]

We'll have to look that out.

[Richard Adkerson:]

We’re shuffling through paper. We'll find it for you.

[John Tumazos:]

Sure. And if there are these high grade zones, are you going to build an electro winning tankhouse for 200 million pounds of capacity, or 300 or more million pounds capacity, or will you take the pregnant solution to the old Safford tankhouse or Miami or Tyrone? It sounds like some of these ores are almost like having a twin, because it has twice some of the ores, has twice as much copper as other ores.

[Richard Adkerson:]

That's right. And as I said, the initial project was to not build new tankhouses for this project but to use what we had available at Safford. And there is still excess capacity at Safford, which would allow us to expand the current project. The next step would be to say do we invest in new processing facilities to match up with the resource that we're finding, and then ultimately with the sulfide. So, it's not going to go to Miami or any of that. It’s -- we're going to use as much as we can effectively of the existing facilities at Safford. Next step will be say, do we do some incremental investment in new facilities, take advantage of the resource. And then ultimately, and this is down the road, if we get to that sulfide, and that could be a very major project for us. Because -- and as I said potentially be a new Morenci. So, that's what's exciting about this.

[Kathleen Quirk:]

John, the reserve grade at Lone Star of oxide, as you probably know, is in the point 0.44 average range. In the early years, we expect the leach ore to be slightly above that in the 0.5 range as -- in the early years. And as Richard was saying, as we mine the oxide, generate cash flow off of the oxide, that really is going to increase the value of ultimate development down the road because effectively we're restricting them -- the ore-body.

[Richard Adkerson:]

Yes. And that's what's great about this, John, because of Safford being there, normally you have a big sulfide resource, you face all this, and you see this example of other projects being developed. You have this massive stripping costs into the today's world where grades aren’t as high. Stripping gets to be a big part of the cost of what you're doing here. Our stripping is creating value. A combination of where it is, near Safford and yet it is stripping and it's going to expose what looks to be a massive sulfide opportunity for us for the future.

[John Tumazos:]

If I could ask one last one, and forgive me. I read of the overture you had from another company a week or two ago. And clearly you're on the brink of copper recovering, new projects, getting Indonesia down, et cetera. And you don't want someone to take a shot at you just before everything turns up. Do you think it’d be a good idea to do a share buyback? Your balance sheet’s turned around and 1 billion or 2 billion of stock buyback might be -- it's nice to be complimented or flattered, but you don’t want somebody trying to do a merger with you just before everything turns around?

[Richard Adkerson:]

So, I do not think the time is right to do a share buyback. And John, you know how long I've worked in this industry. And the one thing that comes home to me through all the things that we at Freeport have been through over the years is life is much better with less leverage than more leverage. And we make progress with reducing our leverage. We're on the verge right now of generating substantial cash flows, which will allow us to further reduce leverage and return to being able to increasing returns to shareholders. I believe that's the right answer for us and that's what we're going to be focused on doing.

[Operator:]

Your next question comes from the line of Andreas Bokkenheuser with UBS.

[Andreas Bokkenheuser:]

Just -- I know we're running a bit late, but just one question for me. Can you just add a little bit more color on the maintenance shutdown we saw at Grasberg in the fourth quarter? I know you installed some ore flow equipment. What was that specifically? And how should we think about 2020? Do you have any particular equipment installation, maintenance shutdown, processes planned sometime in the near future? That's all for me. Thank you.

[Mark Johnson:]

Yes. This is Mark Johnson. We mentioned it in the last quarter update, the planned shutdown. We had one conveyor that in the ore flow system that was able to collect the ore from the Grasberg open pit, and this same belt also collects ore from the Grasberg Block Cave. We no longer needed the portion of that belt that serviced the pit. So, we shortened that belt by about 40%, which just makes the longer-term system more robust. So, it’s a matter of taking the tail portfolio of that belt and moving it to a different location. And then, we also modified a bunch of the motors that control, so that would be a much more modern system for this long-term application at the Grasberg Block Cave. Going forward, we obviously have maintenance plans. They are built into our production plan, that's integral to our planning, looking at crushers, conveyors, mill, which we've always done. So, going forward, the production plans are reflective of our maintenance plans. There's nothing significant or unique coming out. We continue to incrementally add to our infrastructures, as Richard discussed. The rail systems, all those things just continue to grow, but it's all going quite well and on plan.

[Richard Adkerson:]

So, stepping back, we just had this conversation with Mark, what's going to be key for us to meet these production plans and Mark, don’t let me get way out ahead of myself here, but we don’t see that as mining. We see it really as being able to deliver this massive amount of ore from the mining activities to the mill facilities. And this is not, I mean, we benefit by gravity here. We're developing these mines horizontally and not vertically. And so, it's not terribly complicated, but what it does require you to do is make sure you stick with these maintenance programs. And because if you don't stick with the maintenance programs, you're going to have unplanned issues, and that's a lot more complicated. So, throughout the whole system, there is this constant deal of planned maintenance programs. And we really -- our Americas team is supporting our operations out there to make sure that we have our arms around this, because that's what we need to manage to ensure that the ore that we can mine and mining has got its complications, but we are confident about that. But making sure we don't get hamstrung by the fact that we’re moving this massive amount of ore and that our systems are well-maintained and operated to allow us to do it.

[Andreas Bokkenheuser:]

That is very clear. Thank you very much for the clarification.

[Operator:]

Your next question comes from the line of Jatinder Goel with Exane BNP Paribas.

[Jatinder Goel:]

Hi. Good morning. Thank you for taking questions. A couple more from my side, please. Firstly on these productivity enhancement projects, you mentioned $150 million included in current year’s CapEx guidance. Are you able to give a number for 2021 that's included in your current 2021 CapEx guidance? And is that the only spend that you need to do to keep 200 million pounds of production run rate, or would you still need to spend more beyond 2021 as well? Second question is on moly. You are still using $13 price for 2021 cost guidance, but you've taken your production guidance down and you are using $10 for this year. So, just trying to square that you do seem to have spare capacity in the system and $13 looks like a good price, how do I reconcile lowered volume but still using $13 for 2021 cost guidance, please? Thank you.

[Kathleen Quirk:]

Yes. We don't have much capital in 2021 for the productivity initiatives. Total was $200 million, and $150 million of that is in 2020. We spent some in 2019 and we'll have some in 2021. But that is the capital that’s mainly mining equipment and the development costs of these data models that are included in those numbers. So, we do feel that -- and that's what we'll continue to do is to try to do this on with low capital intensity. So, that's -- as we go forward, we'll look to see if there's other incremental projects that have a very quick payback. But at this point…

[Richard Adkerson:]

Yes. We hope we'll add some. It won't be massive amounts. But we -- our hope is that this thing will identify areas that we can spend a little bit of capital and generate good returns -- big returns off of it. Because it is very high returns versus having to build new concentrators and things like that. So that's what's in our plan right now.

[Kathleen Quirk:]

Yes. And then, on the roll forward of the cost. We kept the moly assumption consistent with what we had used previously. At $13 moly, it might make sense for us to increase our primary molybdenum production. But that'll be something that we’ll evaluate. We've been, as you’ve seen in the numbers, we've been cutting back the primary moly production because of market conditions. And we don't want to provide and put a surplus into the market because we have so much volume that comes from our byproduct mines. But, we'll have that opportunity to look at if that’s -- if prices do improve, what the moly production would be from the primary mines. But the byproduct mines are the ones that are included in the cash unit costs that we provide.

[Richard Adkerson:]

Yes. We clearly have the capacity to add to those volumes.

[Operator:]

Your next question comes from the line of Chris Mancini with Gabelli Funds.

[Chris Mancini:]

Hi, everybody. Thanks for the questions. On slide 18, quickly, the $180 million of annual debt service for the smelters, does that include amortization of the $3 billion loan or is it just interest?

[Kathleen Quirk:]

It does include amortization, spread out over the remaining life, so over the roughly, 19-20 years after the smelter’s operational. So, it assumes that it's financed over the life of the reserves. And as I mentioned, we’ll likely have a shorter term financing at first, but that can be refinanced as we go forward. So, it was principal on interest.

[Chris Mancini:]

Okay, thanks. And do you expect any return from the actual investment. So, meaning like, once the smelter’s built, if we were to include any profitability from the smelter, can we like subtract that from the 180 in terms of what the ultimate kind of cost of the smelter is?

[Kathleen Quirk:]

What we're showing here on the right of that chart that by building the smelter we can phase out the export duty. Okay? So, that offsets essentially this principle on interest. But other benefits that we get from the smelter, one, we got an extension of our mine life through 2021. Two, we expect that once the smelter is operational, smelter cash costs generally are below $0.20 a pound. In fact, our line of copper operations were well below $20 a pound in 2019 compared to market rates in the $0.25 a pound range on average. So, you'll have some margins, depending on TC RCs. But, as Richard pointed out earlier, we also get a benefit to the rest of our operations and Cerro Verde and the Americas that with this capacity, it’ll likely bring down market TC RC rates, and that will benefit our other operations that are paying market rates for treatment charges.

[Chris Mancini:]

Okay. It’ll -- so you won't accept -- this won't accept any third-party concentrated, it will be just from Grasberg. And your costs should go down slightly, your treatment costs as right now you're shipping around half your concentrate. So, the treatment costs should go down a little bit.

[Kathleen Quirk:]

Correct. I was just going to say in terms of returns, our mining projects have much, much greater returns. But what the point is here is that we are going to be able to offset the capital cost and interest from the smelter and other benefits.

[Chris Mancini:]

Right. Is that cost benefit at $160 million a year of export duty reduction? Is that in your guidance now?

[Kathleen Quirk:]

Yes.

[Operator:]

Our finalquestion will come from the line of Oscar Cabrera with CIBC.

[Oscar Cabrera:]

Just concentrating, two questions, one in production, the other one in CapEx. So, Cerro Verde is producing about a billion pounds, or produces about a billion pounds a year, your throughput at 420,000 pounds per day, about 60,000 pounds per day higher than name plate capacity. So, was the plan to keep production at about the 1 billion pounds of that declining over the next five years?

[Kathleen Quirk:]

So, I think, Oscar, you right. I mean, we are having to offset the grade decline at Cerro Verde, and we are putting more through the concentrator. In 2020, we expect to be a bit below the 1 billion pounds, but return back to the 1 billion pound level in the years following 2020.

[Mark Johnson:]

And when we designed the plant, it was going to come off -- it would be off 1 billion pounds by now. So, we've been able to keep it at that level.

[Richard Adkerson:]

Yes. And that's what we hope to do with our mining initiatives, and all these things looking for -- I mean, we’re just saying in passing 420,000.

[Oscar Cabrera:]

No, it's a big deal.

[Kathleen Quirk:]

It’s the biggest in the world. I mean -- and we're really proud of it and -- and so, it gives us opportunity to say how can we maximize the resource in ways to help us. And we're going to -- I mean, that's Red’s every day job, try to figure out how to drive the cost down, get more volume, be safe, should have said that for us, right, Red?

[Red Conger:]

You got it.

[Oscar Cabrera:]

Yes. Absolutely, doesn't get lost on us. So, the next question with regards to CapEx is at a higher throughput rate. Do you need to expand your tailings and do you have the permits for that? And if so, why would the CapEx be.

[Red Conger:]

Oscar, we’re in good shape for tailings capacity. But, as we expand these reserves, we're doing tailing capacity studies, where do we put this material in the future and not only at Cerro Verde but at all of our operation. So, as Richard said, that's part of the ongoing work that we're doing all the time, how do we maximize these resources and take care of all the environmental and safety concerns, at the same time.

[Richard Adkerson:]

Fair to say, Red, though, at Cerro Verde that's a planning challenge, just not a constraint.

[Red Conger:]

Very well put.

[Kathleen Quirk:]

Yes. And, we've got 420,000 in site and permitted. Red has aspirations of going above 420, 000 and thinks that we could do that over the longer-term and then that’s what he's talking about is having some planning around what would we need to do to move that up another increment. So, it's a great release. So, it’s in a great concentrator facility. And we're working on scenarios to maximize the value.

[Oscar Cabrera:]

And then lastly, if I may, I think I missed this with one of the previous questions, the CapEx in Grasberg after 2021, would that return to about $1 billion a year?

[Kathleen Quirk:]

It’s less than that. After 2022, it's substantially less than that, Oscar. 2022, it starts to trail off and then very low capital after that. So, that's when really you can harvest the cash flows associated with this higher production.

[Operator:]

I'll now turn the call over to management for any closing remarks.

[Richard Adkerson:]

Again, thank you all for participating. And we look forward to future reports. And David Joint is available to follow-up with any questions you might have. Thank you.

[Operator:]

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