Freeport-McMoRan Inc.
Q3 2016 Earnings Call Transcript

Published: 25 Oct 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Third 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 L. Quirk:]

Thank you. Good morning, everyone. Welcome to the Freeport-McMoRan third quarter 2016 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 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 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 this 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 SEC filings. On the call today are Richard Adkerson, Chief Executive Officer. We also have several members of our senior operating team in the room including Red Conger, Mark Johnson and Mike Hendrix (1

[Richard C. Adkerson:]

Thanks, Kathleen. And good morning, everyone. We're here with a beautiful sunrise here in Phoenix and that's a good way to start our call off. We want to talk about where we've been and what we've accomplished here in 2016. It was a year ago, when our board acted to restructure our board and return our focus to our global leading copper business. And during 2016, we have made some significant accomplishments and we've positioned our company for the future with these significant copper resources and with an improved balance sheet. But, before I really talk about that, I want to address right at the outset the reason why our copper production volumes in this quarter fell short of the estimates. As you know, we are mining in the last phase of the Grasberg open pit. Some ways it's hard to believe, but we started developing it in 1990, and here we are at the very end of the pit. It is at this point, physically a very confined area right at the bottom of the pit, the ore body extends lower but we're going to mine that as an underground operation. But we have current mining in an area that's constricted but it has extraordinarily high grades of copper and gold, and these grades are increasing as we mine. During the quarter, our planned mining rate, the actual physical material we moved that was about 15% short of what we had planned. And as a result of that, we simply did not access as much of this high grade ore as we expected and what our plans projected. We'll talk more about this later and we're certainly disappointed with this mining rate. A lot of it has to do with some worker issues that we're addressing and we believe we can manage as we go forward. But we have the equipment, the mine designs, the people and the ore grades to allow us to mine this material, and so what we're faced now is the fact that we didn't get to it this quarter means that it's a timing issue. We will get to it as we go forward, we'll make up a lot of it in 2017, it will have an impact in the fourth quarter and we should finish mining it early in 2018, so this is not a valuation issue or a really significant economic issue but more of a timing issue. Now looking back fourth quarter of 2015 was a very difficult time, but as we went into 2016, the first half of the quarter was really, really tough as you'll remember. We set out on a path to cut our debt. In response to one of your questions in our year-end earnings call, you pressed me to say what was our target for debt reduction and I said $5 billion to $10 billion. At that point, to be really candid with you, the market was tough that we didn't – I really didn't have a clear cut view that, of how we were going to do it, but we were committed to do it. So we set on this path, now we believe we have clear sight to reducing our debt by $10 billion. And we executed this plan in a way after looking at a lot of alternatives that will enable us to retain a core set of assets that we'll build a great company around. It's characterized by long lives, good cost positions, long-term growth options when markets indicate that future investments will be needed and it will be and a balance of geographic diversity. And so we're really pleased here that we are – we have a clear path now for achieving these objectives. As an organization, we were already on a solid path to cut our cost and our capital spending and our global team has really stepped up to this challenge. We delivered completion of the Cerro Verde project on-time and on-budget. It was a very big complicated project and we moved quickly to adjust our operating plans and our capital spending at each one of our operations to respond to the situation. And our teams had a long history with this. The organization had operated at low grade mines in the U.S. for over 100 years and this has made the team that Red leads and Mark Johnson leads really good operators in dealing with this kind of environment. We operate all of our mines and so we can benchmark our operations and share best practices and people and resources around the company and across the portfolio. Our net unit cost averaged $1.14 per pound during the quarter and this is 25% below last year's third quarter, and before byproduct credits costs were down 20% over the year. And at each one of our sites, we have really focused on cash flow generation and we look at our performance net of sustaining capital cost and we've been very tough on capital at this point. And despite these low prices, our team is very enthusiastic and focused and energized to maximize cash flows. During 2015, our CapEx exceeded our cash flows. That was primarily because of the oil and gas business. We worked hard to reverse this and generated $500 million in cash flows above CapEx in the third quarter. And we expect to be able and are confident we can continue to generate free cash flow over the next several quarters, even at low prices, because we're going to constrain capital spending, until the market warrants new investments, and that will contribute to our debt reduction – achieving our debt reduction targets. Year-to-date, we've announced $6.6 billion in anticipated proceeds from asset sales transaction. This does not include potential additional consideration of $680 million. We've to date received proceeds of $1.4 billion and expect to receive $5.2 billion by yearend from transactions that have – are under contract, which we expect to close. So these steps will enable us to achieve our delevering objective of cutting our debt in half by the end of 2017, but keeping a really strong set of assets that over the long run will enable our shareholders to benefit as the market recovers. Slide four, is a summary of our recent announcements of our oil and gas transactions. You'll recall that at the end of 2015, we announced a process to evaluate options for this business. Our board engaged special financial advisors, and we went into the marketplace to see in the first quarter if we could find a buyer for the whole business. Now that was a really tough time to try to find someone to buy a set of assets like we had in the oil and gas business, couldn't have been worse. And by the end of the quarter, in the first quarter of this year, we had concluded that we would likely retain these assets for a longer period of time. And that we'd hold onto them and wait for a market recovery. At that point, we reorganized our management of our oil and gas business. We changed it from being a standalone separate business to being a division of our company. We put together from the existing group a really effective operating management team. And so that was the plan going into it. After the first quarter and after we had announced what we were going to do, parties emerged with renewed interest, who are talking to us about buying sets of those assets. And so, we continued our process of discussions. I can assure you that we gave everyone in the marketplace the opportunity to come in and talk with us; people knew it. Bankers were out knocking on doors. And so, we really had a process that exposed these assets to the marketplace. And at the end of the day, we had a competitive process, and we reached a transaction in September to sell our production in the Deepwater Gulf of Mexico to Anadarko. And then, in October, we've now announced a transaction to sell our production onshore in California. In the aggregate, we will receive $2.6 billion in gross proceeds and $300 million in contingent consideration. And I will assure you we thought long and hard, and had active discussions with our board about selling these assets during this period of weak oil prices and taking into account the current outlook for oil prices. And – but the nature of this oil and gas business is such that, because of depletion, particularly in the Gulf of Mexico, it would require over time continued reinvestment to maintain the assets. If you didn't do that, they simply go away. And then, you have very significant reclamation obligations, and the government's rules for providing financial assurance for those reclamation obligations are being – are changing and requirements are likely to be more significant. And so, we took all that into account and concluded that these transactions were consistent with our strategy, and would allow us to focus on what our future is going to be. Now, I can tell you I've read analysts who assigned a much higher value to these assets than what we sold them to, a theoretical value. Buyers weren't willing to pay that. After a very extensive process that we went through I'm convinced we got very attractive prices for us. The purchasers will likely do well with these assets because they're good assets. But for our company, considering the total implications financially of continuing to be in that business and hold them, I'm very comfortable with what we did and really pleased that we were able to get that done. So, that is summarized on page 4, and I'd be happy to answer any questions about it. Now, we continue, looking at page 5, to progress the sale of our PT asset. You've all heard me say that this is an asset that we sold with great reluctance. It's a great long-term asset and fit very well in our portfolio, and I'm very proud of our team. When we started out in 2008 in developing it in a very challenging environment and going through the financial crisis and working on all of the issues of doing business there, it's been a real pleasure to do business in the DRC and work with the people there and see what our team has done. But it's also an asset that values are going to be realized over very long periods of time. And we were able to find a buyer at a valuation that's attractive in relation to near-term cash flows. And China Molybdenum, a privately owned Chinese company that's making global investments in the mining industry, is progressing their transaction. The process has gone smoothly. It is a public company, not a state-owned company, and they have gotten their shareholder approval and other regulatory approvals within China that was necessary to go forward with the transaction. And where we are today, there is still a condition remaining to close is resolving a transfer right that our minority partner, Lundin Mining, has in the property in contract. It's called the Right of First Offer or ROFO, and we've been working with China Moly and Lundin to resolve this. We've currently extended the timeframe for resolving it to November 15. You've also read that Gécamines, the state-owned mining company in the DRC, has asserted that it has preemptive rights to this transaction. The transaction itself involves entities outside of the DRC at a different corporate level. We disagree with Gécamines' assertion on this, and our legal advisors support our conclusion. But we're working with China Molybdenum, with Lundin, with Gécamines and with the government, so that we can all find a way forward to work together to resolve this issue. China Molybdenum has strongly expressed their commitment to closing the transaction as soon as possible, and we're working together to find the appropriate resolution for the Lundin ROFO. We still expect to close the transaction in the fourth quarter. It's $2.6 billion in proceeds and $120 million in contingent consideration, and we're also giving them exclusive rights to acquire an exploration property we have in the DRC and a downstream cobalt business. So all of that is working to get closed in the fourth quarter. So, putting this all together on slide 6, you can see the aggregate steps that we have taken. If we look at the completion of these asset sales transactions, completion of the previously announced $1.5 billion after-market offering, which to-date we have completed about 25% of that $1.5 billion amount. Execution of our operating plans, we expect to achieve our debt targets by the end of 2017. And we are well on our way of doing this. We have the portfolio of remaining assets that we want to keep. We're not planning additional divestments. We may take some steps to deal with the remaining assets in our oil and gas business, and we are prepared to divest at Grasberg an additional roughly 20% interest pursuant to our discussions with the Indonesian government. That is contingent on, conditional on getting our long-term rights extended on the basis of giving us fiscal and legal assurety, but we've – we're committed to the government to sell an additional 20% interest. That's not in these numbers. So, at the end of the day, we will have a reasonable balance sheet and industry-leading portfolio of copper assets that would be available for long-term development. And these are the sorts of assets in the copper business that at best are very, very difficult to replicate if at all possible. So, looking at those assets, on page 7, is an overview. We have – we will have seven copper mines, which will be led by Morenci, seven copper mines in North America, which will be led by our flagship Morenci mine, which is a fabulous operation. These mines are very long lived. It gives us long-term optionality on copper prices and future investment opportunities. We will have two mines in South America

[Kathleen L. Quirk:]

Operator, we're ready for questions.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question will come from the line of Matthew Korn with Barclays. Please go ahead.

[Matthew J. Korn:]

Hi good morning, Richard and everybody.

[Richard C. Adkerson:]

Good morning, Matt.

[Matthew J. Korn:]

So, let me ask on this, you had the mining rate issues this quarter, you had the labor stoppage, and the implication seems to be that the problems over the third quarter that you saw are going to hamper production in the fourth quarter, effectively pushing some of that back into next year. Can you clarify are you more constrained in what you can produce over fourth quarter, because of these lingering issues or is this move around out of any kind of conservatism? I'm just trying to understand how much of the shift is you responding to conditions at the mine? And how much if any – is any market conditions positioning as you negotiate with the Indonesians, et cetera?

[Richard C. Adkerson:]

Okay. There is just a physical aspect to it. As we progress our mine plan at this stage, we get to higher grades as we go forward. So, the fact that we were not able to mine the material that we planned to mine in the third quarter, means it's just simply going to take longer to get to the higher grade material that we had originally planned to mine in the fourth quarter, and that gets pushed out. We can't do more to get to it quicker, because we're constrained by physical space. So, our plan calls for us to do everything we could do all along, and when it gets pushed back, it gets pushed back over time physically. So, it's not a – it's really not a strategic or tactical decision, but it's a physical consequence of what we face now. We know we've got to be diligent about keeping our equipment operating and available and so forth, because delays in that can have an impact in the future. We're working hard to address these issues of concern by our workers, we made some responsive steps to the issues they raised in terms of the bonus, in terms of the relationships between supervisors and the workers and that's an ongoing process that we'll have to work with, it's a complicated labor situation there in Papua with the nature of the workforce, and how it's changed over the years. All of this requires a lot of attention and a lot of work. What it doesn't change is that high grade ore that's there. I mean that remains there and it's a question of getting to it as quickly as we can. We want to do it – safety is the first issue, but we're not trying to do any of this in terms of positioning with the Government of Indonesia. We want to operate in an efficient straightforward way, that's been our history, and that's going to be our future. While we're doing this, I might add that our work in underground development is going extraordinarily well, I mean, we're meeting our targets in terms of development and putting things in place. We're getting approvals from the government to do what we need to do, that's a big project, that just kind of gets out of the spotlight here, but it's in total over time a $15 billion investment project, and we're spending roughly a $1 billion a year, and that's the future for us, and our partner Rio Tinto as we move forward, so, as we're dealing with these important issues near term in the pit we're also giving keeping great focus on the underground development and it's going very well.

[Kathleen L. Quirk:]

And Matt you can see on – this is Kathleen, on slide 12, we show the grades of both copper and gold in the open pit. And because of the variability in the grade, we'll be mining in the fourth quarter, material that previously had a higher grade. But because we got the behind in the third quarter, we'll be mining material that we thought we were going to mine in the third quarter that has a lower grade. But we do expect to get to all of it because the open pit will be transitioned to the underground in 2018. So, that, as Richard talked about, it is shifting now by a couple of months the access to the higher grade material, and that cascades into 2017 and 2018.

[Matthew J. Korn:]

Got it, Kathleen. I appreciate the clarity there. Let me follow-up with a question for you, if I could. Looking at the language in your filings, there is the springing collateral trigger, and if the $3 billion kind of threshold in asset sales isn't reached, you've been very clear expecting – in laying your expectations for things still moving for the fourth quarter. But in a bad outcome, let's say anything happens with Tenke, anything happens with Deepwater, what kind of collateral would we be talking about? What would be that actually look like numerically?

[Kathleen L. Quirk:]

Well, the terms of our amendment that we did with the banks in the first quarter of this year have a springing collateral really for all of the assets. And so our plan was if we didn't get to the sales proceeds, the $3 billion, that we would sit down and discuss with the banks the nature of the collateral. But as it reads right now, it's basically all the assets. But we're very confident that we'll be able to meet that test. We've got three transactions. We've already completed a significant amount of proceeds already in the first part of the year. So, we're confident that we'll be able to meet that test and avoid the need to grant the collateral, that the springing collateral test that you referenced.

[Matthew J. Korn:]

Got it. Thanks very much, folks.

[Richard C. Adkerson:]

And Matt, I'll just say, we have great relationships with our bank group. And this goes back for years of how we managed things historically after the Phelps Dodge deal, deleveraging that, how we managed the financial crisis in 2008/2009, how we dealt with the situation following the oil and gas leverage, and so we work very well. We have a lot of credibility, and so we'll continue to work together to represent each other's interests on this.

[Matthew J. Korn:]

Thanks, Richard.

[Operator:]

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

[Christopher Terry:]

Hi, guys. Just a couple of questions from me. Just following up on Grasberg. I'm thinking about that the transition period between the open pit and the underground. And so your latest mine plan, does that have the open pit finishing at around the end of 1Q 2018. Is that correct? And ...

[Richard C. Adkerson:]

Yeah, that's correct.

[Christopher Terry:]

...that transition would be sort of 2Q 2018, and is the underground all on track for that?

[Richard C. Adkerson:]

The answer is yes. Mark Johnson is here. He can...

[Mark Johnson:]

Yeah, the Grasberg Block Cave development has gone on without any interruption. We expect to have the ore flow system, which is one of the main systems for the Grasberg Block Cave to come online, that will be available to us at the end of 2017 well in advance of the start of the block cave. By the nature of the block cave mining is such that we will not initiate the cave, but we can do a lot of the preparation for the cave prior to the pit completing. As soon as the pit is complete, then we start a process of initiating the Block Cave and then that ramp up process will take place with the capacity coming online as we develop more draw points. So, it's on track. The Deep MLZ, we initiated the cave earlier this year, and that continues to advance, and we're well positioned for that mine to continue to grow in capacity. By the end of the year, we'll be at 10,000 tons a day. Coming out of the Deep MLZ by the end of 2017, that will be up to 25,000 tons a day. So both of these mines would be in a ramp-up process over the next five years to six years to get them up to full capacity.

[Christopher Terry:]

All right. Thanks. Thanks for the color. And then the last question from me, just on the SG&A, thinking about that going forward post the two transactions in the oil business

[Richard C. Adkerson:]

Yes. We're going through that process now and obviously taking the steps to deal with the significant SG&A we had in the oil and gas business. But we're also continuing to look at our corporate G&A and so forth, and our overall target is to return this to levels that were in place before we did the oil and gas deal and try to find ways of reducing that.

[Christopher Terry:]

Okay. Thanks, Richard.

[Richard C. Adkerson:]

Thanks, Chris.

[Operator:]

Your next question comes from the line of Tony Rizzuto with Cowen & Company. Please go ahead.

[Anthony B. Rizzuto:]

Thank you very much. Hi, Richard, Kathleen, Red and Mark.

[Richard C. Adkerson:]

Hi, Tony.

[Anthony B. Rizzuto:]

Hi, there. First of all, congratulations on all the progress so far. You've really been doing some tremendous things, so kudos. My question is I really wanted to drill down on Indonesia, and I was wondering, Richard, how would you describe the overall tenor of your negotiations with the government these days? Obviously there has been a lot of moving parts with the cabinet officials, et cetera?

[Richard C. Adkerson:]

Okay. And Tony, I know you're well aware of all this, but I just want to be clarifying. We haven't really been engaged in negotiations. We set a plan in the mid 2014 when we signed a memorandum of understanding about how to go forward, and that's when we agreed to pay higher royalties, to divest up to 30%, to develop the smelter in return for the government approving the extension of our contract beyond 2021 on the same fundamental terms as our existing contract and agreed to allow us to export. So since that time, it's been more of a question of talking with the government about getting that approved as opposed to continuing negotiating terms. And that MOU was extended once in early 2015, and in October of 2015 we received a letter from the government, basically affirming all of that. And so there has been lots of political changes in Indonesia. But we haven't been engaged in negotiations. It's just been more of a question of working with them to put in place the agreement that we've previously reached.

[Anthony B. Rizzuto:]

I guess I'm trying to get at has there been – in your discussions has there been a change in the tone, or are they becoming a little bit more accommodative, do you think? And would it be your expectation that we could see tangible progress on the export situation? Obviously, you've got the license right now, but would your expectation be that the 2017 situation would be resolved maybe in advance and not having to go down to the wire again, or is that...?

[Richard C. Adkerson:]

Well, I went back and I read my – the transcript from last earnings call, and we talked then about need to getting the August extension of our export permit at the time. We got that. Now, we're faced – as these all have done, that's has gone down to the wire. Now, we're faced with this January 2017 broader issue. It's not just a question of getting a permit for our company, but it's a regulation that affects a number of industries. It's not just copper, but it affects other industries as well. And the tone has been a recognition by the government that that needs to be addressed. How they address it is a matter of great interest for us. And as has been the case, there are a lot of different views expressed publicly by members of the DPR and certain members of the government, but we believe in our discussion, there is a recognition that this needs to be addressed and will be addressed. The discussions that we've had, the President has been very positive about the need for foreign investment and the need to treat existing investors well. The Vice President recently made some comments along this line. We've had this – the situation of reshuffling of the cabinet and the unusual situation of – with respect to the minister and so we are just having to deal with all of that and we keep emphasizing with the government our history of investment, the fact that we're providing work for over 30,000 people in Papua, the benefits that our operations have provided, and will continue to provide to the government and the government's fiscal situation is such that that this is important and then moreover the role we play in Papua. We're over 90% of the economy in the region, in the region where we operate, a majority of the GNP in the province itself. So all of these things are things we talk about and have talked about from a long period of time, and that's what's going to lead to a positive resolution of this for us. But the timing of it Tony I...

[Anthony B. Rizzuto:]

Yeah.

[Richard C. Adkerson:]

It will happen, but it may go to the wire.

[Anthony B. Rizzuto:]

Yeah. And then just the new mining law, while I understand the new mining law is being drafted and I would imagine the export ban is obviously part of that, that's going to be addressed. And would it also be conceivable to see the government has indicated that you got the 2021 expiration of the current CoW that you really wouldn't be able to negotiate that until two years before the end of that initial term. Would this conceivably be part of this new mining law that's being put together at the moment?

[Richard C. Adkerson:]

Well, there is actually – I can identify three principal ways for the government to deal with this. One is changing the mining law, as you point out. That's complicated the present law in 2009 took several years and it was very complicated to get negotiated. The government can deal with these issues also through changing regulations. The existing mining law has the flexibility of extending our contract of allowing exports and so forth without changing the law, but changing regulations, which is in the authority of the administration. There is also a process of where the president can issue executive orders called purviews (55

[Anthony B. Rizzuto:]

Thanks for all the color, Richard. I appreciate it.

[Richard C. Adkerson:]

Thanks, Tony.

[Operator:]

Your next question will come from the line of Orest Wowkodaw with Scotiabank. Please go ahead.

[Orest Wowkodaw:]

Hi, good morning. I still have a couple of follow-up questions on Grasberg. If the export ban is upheld as it currently stands, can you give us an idea of what percent of the concentrate would be unavailable to go to Gresik next year, i.e. could be impacted?

[Richard C. Adkerson:]

Yeah. It's a very large amount. I mean Gresik is no more than, could absorb no more than 40%, probably a little less than that. And as a practical matter, with today's copper prices – I think most of you know that we were surprised when the government put in place an export ban in January 2014, that lasted seven months. We continued the total operation at that time, it ended up costing our company and the government. The government gets a bit more than 50% of the cash flows out of this operation, it cost each of us $1 billion during that timeframe. Well. At today's copper prices, we simply could not continue our operations like we did in that timeframe. We would have to make very significant adjustments to employment and spending and so forth. So, it's just a very important issue for us.

[Orest Wowkodaw:]

So, if the export ban stays in place, you'd reduce production pretty quickly?

[Richard C. Adkerson:]

We would have no choice.

[Orest Wowkodaw:]

Okay. And in terms of the guidance for CapEx, I assume that 2017 guidance excludes any smelter spending. Is that correct?

[Richard C. Adkerson:]

It does not include smelter spending.

[Orest Wowkodaw:]

Okay. And then in terms of your long range plans at Grasberg, it sounds like you're suggesting that you'll continue to spend the $1 billion a year, developing the underground even without the CoW extension. Is that the right way to think about it and it's really just the smelter that's, you're holding back on?

[Richard C. Adkerson:]

Yeah. That's correct. We've gone through several assessments over time, about whether to continue spending or not. We've done it on the basis of assurances that we've received from the government in the MOU and in the October 2015 letter, I mean that gave us assurances, which we've taken into account, as well as the negative aspects of suspending spending. To suspend spending would result in delays of the development that Mark Johnson went over in terms of having the Grasberg Block Cave ready to go onstream when we complete mining the pit, it would involve significant employment reductions and we operate in a very sensitive area in Papua that would have unknown consequences and putting a lot of people out of work. It would require dismantling our team that we have there and the time that would require to put that team back together. So, we've relied on the assurances from the government to keep that spending going.

[Orest Wowkodaw:]

And if you decide that there is no resolution on the horizon and you do decide the pull back the spending, where would we see that in terms of the production profile like would it be 2018 or 2019 where we would see the impact?

[Richard C. Adkerson:]

No question. I mean if we don't have the Block Cave ready to start ramping up, it would have you just push that ramp up back. You can see the timing required to bring a new mine at Oyu Tolgoi upstream we would have that same ramp up issue that's just fundamental for Block Cave development. We can't start caving until we finish the pit.

[Orest Wowkodaw:]

Got it. Thank you very much.

[Richard C. Adkerson:]

All right. Thank you.

[Operator:]

The next question comes from the line of Andrew Quail with Goldman Sachs. Please go ahead.

[Andrew Quail:]

Good morning, Richard and Kathleen. Just got a couple of quick ones. Mainly on the – just on net debt. You guys obviously have flagged the $5.2 billion in gross proceeds. I just wanted to make sure I'm reading this right and that sort of includes the preferred dividend and if we take that out more like a $4.6 billion that you guys would expect to receive in Q4?

[Kathleen L. Quirk:]

Yes. We would – we have a $582 million requirement, a redemption of a preferred at a subsidiary level that would net out of those proceeds.

[Andrew Quail:]

And that's obviously included in page 6 when you're talking about your net debt next year at different copper prices?

[Kathleen L. Quirk:]

Correct.

[Andrew Quail:]

Perfect. And then my last one is just obviously you also talked about you're about 25% of your upmarket equity offering, given the price that you guys have disclosed in your average share price. Is that something that we should sort of look forward in the next sort of six months that you guys would be more comfortable transacting?

[Richard C. Adkerson:]

It's just a question of one of the reasons that it attracted us to this kind of equity raise is that, we can time when we go in the market and not and so we executed it, we backed off and we expect over the next six months or more to be back in the market when the market is – when we feel better about doing it it's totally at our discretion.

[Andrew Quail:]

And one more, so you guys obviously – the balance sheet is well on the way to where you want it to be. Does that mean that there's no more asset sales over the next 12 months?

[Richard C. Adkerson:]

Well, I think I was clear about that we like our assets that we have in our mining business and we would not expect to have sales there. We have some relatively minor oil and gas assets that we may find ways of doing transactions there, but no we're basically done with asset disposals.

[Andrew Quail:]

Okay. Thanks very much.

[Richard C. Adkerson:]

Thank you, Andrew.

[Operator:]

Your next question comes from the line of Chris Mancini with Gabelli & Company. Please go ahead.

[Christopher Domenic Mancini:]

Hi, everybody. Just a quick question on the copper sulfide opportunities. Is – would this essentially entail if you were to go ahead with these just a modification to the back-end of the plant and then laybacks on your current pits? Is it similar to what you did at Morenci? And then, what copper price do you think you would need to incentivize the development of these sulfide opportunities. And like, for example if your balance sheet were – if you had no net debt for example, would you even potentially proceed with some of these projects now?

[Richard C. Adkerson:]

I think it would be unlikely to do it now...

[Christopher Domenic Mancini:]

Okay.

[Richard C. Adkerson:]

...because – I'll answer that, but it's just because we're at $2.10 copper and there's still significant questions near-term about where the global economy is going, where China is going. So, it's not just us. I mean, you're not seeing others doing new projects. Some are completing projects that they started sometime ago, so even if we had all the cash in the world, we wouldn't be pursuing these projects as we speak right now. Now, the development itself varies depending on the ore bodies. Let's take for example El Abra which has – and we didn't know about this when we acquired Phelps Dodge but subsequent exploration has shown an enormous, sulfide resource there and to-date, that operation has been an SX-EW operation...

[Christopher Domenic Mancini:]

Right.

[Richard C. Adkerson:]

... bauxite, sulfide. So this would be a Cerro Verde type project with a very large mill required. You would have a desalinization plant and the transport of water to more than 10,000 feet. So, it's a big capital project. At Lone Star, we have an existing operation there at Safford, and that would be done in stages of where we would have an oxide development, which would actually be stripping this down to a sulfide project which would require major mill investment. At Bagdad, we have a big sulfide resource, it would require a mill expansion, tailings expansion and investment in water access. So, everyone of these has its own story and there's trade-offs. Lots of advantages in the U.S. today that weren't there historically in terms of energy cost, labor, flexibility. And so it's really a matter of trade-offs, we're doing technical work, so that we'll be in a position of doing it, it would require long-term copper price of $3 or better to have us make these sorts of investments.

[Christopher Domenic Mancini:]

Okay. Okay, great. So it's a kind thing of where – we should just think of this as optionality. And when you do – when the copper price does eventually reach $3, you'll start potentially thinking about deploying the capital to exploit all the vast resources there.

[Richard C. Adkerson:]

Right. It's going to be an outlook. So we'll aggressively do steps to prepare ourselves because all of these are very long timeframes.

[Christopher Domenic Mancini:]

Yeah.

[Richard C. Adkerson:]

We're a view of the industry, this is just not us. This is the way the copper industry is and so these delays in spending are going to match up with declining grades, depletion of existing production, and I am not saying this is this year or next year, but a looming shortfall...

[Christopher Domenic Mancini:]

Right.

[Richard C. Adkerson:]

Is just, unless you see the world really turning upside down economically, it's clear that there is going to be a need for copper that's going to require a significant price increase to justify the spending, and that's why we feel very good about our long-term strategy.

[Christopher Domenic Mancini:]

Okay, great. Thanks a lot.

[Operator:]

Your next question comes from the line of Karl Blunden with Goldman Sachs. Please go ahead.

[Karl Blunden:]

Hey. Good morning, guys. Thanks for taking my question. Just wanted to focus just briefly on the balance sheet, you've announced a lot of actions over the last couple of quarters. One thing that a lot of other mining companies have done is issue debt now that the markets are relatively favorable and extend their maturities. Is that something that you consider at all just to get a bit more cash on the balance sheet as you head into a time when in 2018, 2019 and 2020, you have quite a few maturities coming due.

[Kathleen L. Quirk:]

Well, Karl we've really been focused on taking debt down. Once we achieve our debt level that we're targeting, we'll look to what makes sense in terms of any refinancing, but we've really have been focused on taking absolute debt levels down as opposed to refinancing existing debt, and that's really our priority is to reach these targets, which we're well on the way to. And then we'll look opportunistically as to whether we should take steps to expend out maturities, once we get to the targeted debt levels.

[Karl Blunden:]

That makes sense.

[Richard C. Adkerson:]

The cost of our debt has changed significantly over the last six months to nine months too. So, that's been a factor, and we believe as we improve our balance sheet, we could well be able to do what you are suggesting at a lower cost.

[Karl Blunden:]

Yeah. And, I think that makes sense. I think one other low cost option just kind of nearer-term is, as you look at to your credit facilities, I saw on page 18 and appreciate the clarity you provided there, that pro forma for the asset sales, it looks like it's your intention to pay down the bank term loan and the revolver as well and keep those paid down. At some point in time, would that be kind of something that you'd consider going to, to get a bit more funding there? Presumably you can do it much more cheaply than in the kind of the open bond markets. And, do you think you could do that without having to provide a security to those lenders? So, in other words, could you get unsecured bank lending to kind of bridge you through this period while you're continuing to repair the balance sheet?

[Kathleen L. Quirk:]

Well, the slide that we show repaying the full term loan is really just essentially math, the 50% of the proceeds being applied to the term loan. In terms of whether we could get unsecured bank debt today, I think that's a difficult question to answer. The banks are all under a lot of pressure in the sector about regulations, and I think they would be looking, for a new deal today, looking for security given the company's credit rating. But what we're working to do really is to improve the whole balance sheet and to allow banks and others, as they're looking at the company, to look at it as it is pro forma for all these transactions. And as we continue to de-risk the balance sheet, we think there are going to be additional options available to us to finance the company long-term, and that's what we're focused on.

[Karl Blunden:]

Okay I appreciate that. Thanks very much.

[Operator:]

Our final question will come from the line of Matthew Fields with Bank of America. Please go ahead.

[Matthew Fields:]

Hey, everyone. Just wanted to ask a couple, one – one sort of more question on Grasberg, and then a bigger picture question to finish it out. Given where we were three months ago with the mine plan at Grasberg and where we are today, it seems like there is a lot of a shortfall. And I know that production stoppages for 10 days are sort of unforeseen. But it seems like you would have anticipated that the physical area of the bottom of the pit would be smaller and that the – it seems like the shortfall in production that you're anticipating is more than just unexpected stuff. So, my question is sort of what happened that you weren't expecting, and is there a chance that that could happen in 2017 as well?

[Richard C. Adkerson:]

Well. I mean the – our talk about the physical constraints is to explain the consequence of these unexpected things happening. And so, we built all that into the plans that we went into the third quarter with. We absolutely knew that we had limited amounts of area, and we projected, based on our past experience, on equipment availability, and worker – workforce productivity, what we would achieve. Then we were faced with these issues related principally to the workers, and that had the consequence that it had. So, we took it into account. Yeah, we said we were 15% short of our mine rate. So, that's what it was, and it had a consequence of changing our production profile. Do we have risk going forward? Yes. I mean, going forward, we will need to operate our equipment well. We've had a long history of doing that. We will have to deal with our workforce. We've been doing our utmost do that. But yeah, I mean that's always one of the risks of our business. We have a great history of meeting those risks, but it's particularly significant in terms of near-term cash flows because of the grades and physical situation in the Grasberg pit. But yes, it's a risk.

[Kathleen L. Quirk:]

The -- normally and historically with Grasberg and other open pits, you'd be mining in multiple sections. So, you'd have a lot more flexibility to make up things. And here it's a very focused area, very high grade area. So even a small amount of downtime on a truck or a shovel can have more impactful variances than what you would have seen historically in another pit or historically at Grasberg. So, but we're very confident that while we could have lifts in the volumes, we're very confident that over this period of time, relatively short period of time, we'll be able to access very significant volumes of both copper and gold. So it's not a question of day-by-day predictions or forecast. It's really looking over this period, and we feel very confident we'll be able to – we have the plans in place to obtain these volumes.

[Mark Johnson:]

Something I'd like to add -- this is Mark Johnson -- is that, even though we've had some production delays or deferrals, a couple of things that we have accomplished is that the high walls of the mine are very robust. We implemented a very comprehensive final pit blasting, final wall blasting process, which is – will provide us possibly some upside on the feeding (76

[Matthew Fields:]

So is that maybe some of the disparity between the mine plan from three months ago and this mine plan is that sort of more worker instability in the fourth quarter?

[Mark Johnson:]

We've – the Grasberg is quite a – we've been able to demonstrate the mining rates and what we looked at a lot is our sinking rate. How many push backs we mine in a year. I'd say, we've historically been very aggressive on that. We've had push backs where we do over 18 benches a year. We based a lot of our mine plans based on that ability, which takes into account the limited mining space, and we're looking at somewhere to 15 benches to 16 benches as we complete the pit, 15 benches to 16 benches a year. So that's something that we've been able to do before that accounts for space and equipment sequencing. We feel comfortable, we did make some adjustments to our mining rates in the fourth quarter. Our previous forecast had slightly higher mining rates. We're currently projecting that for the remainder of the quarter that we're going to do in the order of 180,000 tons a day. We feel comfortable with that plan. We have some things that we'll manage on a day-to-day basis. We're working closely with our supervisors on communication plans with the workers. So, it's – there is multi-elements of how we are approaching the productivity issues in the pit. We've also brought some resources from Red's team over there, we've got a group of guys there now that are helping us just look at sequencing and making sure that the pit blasting is going on as scheduled. So, we're throwing a lot of resources at it and we understand the importance of it. We are, like I said, focused on the quality of mining. We want to ensure that everything we're doing doesn't limit our ability to complete the pit in a safe and efficient manner, we are one of the deepest pits in the world, very steep high walls. We've been able to manage that well and we're continuing to focus on that also.

[Richard C. Adkerson:]

So, let me just summarize this. We have to execute these plans, and that's what we're working to do. We have to execute these plans, if we don't execute these plans, some of the ore gets deferred. It's not a big economic issue, because the ore is there and we'll get it over time. But, we have to execute the plans to meet these numbers. We give you our best outlook on what we're doing, and now we've got to go try to do it. If we don't do it, it just means, we'll mine it over time. So, you said you had one last question, Matthew.

[Matthew Fields:]

Yeah. So, sort of you touched on the sulfide expansion opportunities earlier, I'm just wondering longer term after sort of that, the really high gold years at Grasberg and longer term down the road when you give it more economics to Rio Tinto in 2021, what's the sort – can you maybe rank your sort of best expansion opportunities to get copper back up to 4 billion a year sort of longer term, whether it's the sulfide expansions or some new development project or even some M&A down the road?

[Richard C. Adkerson:]

Well, the M&A down the road is just going to depend on circumstances as we go forward and that's always out there. We're not counting on that but we'll be in the marketplace and see what it is. So – but, really it's the sulfide projects and how we time them, how we go after it. We have – we talk about 4 billion pounds, 5 billion pounds a year, we've got 100 billion pounds of proved and probable reserves, we've got more than a 100 billion pounds of resources in addition to that, so we've got a huge set of resources to work on to plan. And so we've got opportunities for long-term growth in this business as far as you can see.

[Matthew Fields:]

Richard, I have one last question. Do you have a cameo in the upcoming Matthew McConaughey movie?

[Richard C. Adkerson:]

Well, I am interested to see it because I was certainly living it all and we'll just have to wait and see. They haven't signed a release for me, so I don't know, but I will say in listening to Mark, I made my first trip to Grasberg as they were drilling the second drill hole out there in early 1988, and so I've lived through this great ore body and what our team has done over the years and I'm amazed every time I go out there. In the early years, when we'd fall short we always had another place to go mine to make it up. And so we had all, a lot of these same issues but we just had a lot more flexibility. Now that flexibility is gone and that's why we're dealing with these quarter-to-quarter issues that we have. So....

[Matthew Fields:]

Absolutely. Well, thank you very much for the update.

[Richard C. Adkerson:]

All right. Thanks a lot.

[Operator:]

Now we will turn the call over to management for any closing remarks.

[Richard C. Adkerson:]

Well. Thanks everybody for your interest and as always if you have follow-up questions, contact David Joint, and we'll get them the answers. And we look forward to talking to you next quarter.

[Operator:]

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