Freeport-McMoRan Copper & Gold's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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Executives

Kathleen L. Quirk – Executive Vice President, Chief Financial Officer and Treasurer

Richard C. Adkerson – President and Chief Executive Officer

Harry M. Conger – President-Americas

Analysts

Sal Tharani – Goldman Sachs & Co.

Paretosh Misra – Morgan Stanley & Co. LLC

Oscar Cabrera – Bank of America Merrill Lynch

Brian H. Yu – Citigroup Global Markets Inc.

John Tumazos – John Tumazos Very Independent Research, LLC

Anthony Rizzuto – Cowen Securities

Brian T. MacArthur – UBS Securities Canada, Inc.

Garrett S. Nelson – BB&T Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct the question-and-answer session. (Operator Instructions)

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 and welcome to the Freeport-McMoRan Copper & Gold first quarter 2013 earnings conference call. Our results were released earlier this morning and a copy of the press is 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. As usual, we have several slides to supplement our comments this morning and we’ll be referring to the slides during the call. They are also accessible using the webcast link on fcx.com.

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. 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 Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, our Chief Executive Officer; Red Conger is also with us today and Dave Thornton is here as well.

I’ll start by briefly summarizing our financial results and then turn the call over to Richard, who will be reviewing our recent performance and outlook and covering the information in our slide material. As usual, after our prepared remarks, we’ll open up the call for question.

Today, FCX reported first quarter 2013 net income attributable to common stock of $648 million or $0.68 per share, which compared with $764 million or $0.80 per share for first quarter of 2012.

Our first quarter 2013 net income attributable to common stock included charges totaling $50 million or $0.05 a share associated with debt extinguishment costs for the termination of the acquisition bridge loan facilities following our successful permanent financing and for costs associated with pending transaction – the oil and gas transaction and the recently completed transaction of – the acquisitions of cobalt chemical refinery. Our first quarter 2013 interest expense also included $17 million of additional interest related to the new debt that we issued in March, which we’ll discuss in more detail.

First quarter 2013 consolidated copper sales of 954 million pounds were higher than our previous estimate of 940 million pounds, primarily reflecting higher production and sales from Africa, where we have just completed a second phase expansion. Sales were also higher than first quarter sales of 827 million pounds because of higher production from Indonesia and also the higher production from Africa.

Our first quarter 2013 gold sales of 214,000 ounces were slightly lower than the January 2013 estimate of 230,000 ounces that primarily reflected the timing of shipments at quarter end. As expected, gold sales were lower than first quarter 2012 of 288,000 ounces primarily because of anticipated lower grades in Indonesia.

Our first quarter 2013 consolidated molybdenum sales of 25 million pounds were higher than our January 2013 estimate of 23 million pounds in the year ago quarter of 21 million pounds, primarily reflecting some stronger sales volumes in the metallurgical and chemical sectors.

Our realized copper price during the quarter averaged $3.51 per pound compared with a realized price in the year ago quarter of $3.82 per pound. Our gold realization in the first quarter of 2013 was $1,606 per ounce compared to $1,694 per ounce in last year’s first quarter. And molybdenum prices, our realized prices averaged $12.75 per pound in first quarter 2013 compared to $15.34 in the year ago period.

As anticipated, consolidated average unit net cash cost net of by-product credit averaged $1.57 per pound were higher than unit net cash cost of $1.26 per pound in first quarter 2012, primarily reflecting lower by-product credits. We generated operating cash flows during the first quarter of $831 million. That was net of $430 million in working capital uses and capital expenditures during first quarter totaled $805 million.

We ended the quarter with $10.1 billion in debt, total debt. That included $6.5 billion of notes that we issued in March 2013 in connection with the pending acquisition and we ended the quarter with $9.6 billion in consolidated cash.

As previously reported, in December of last year, we announced definitive agreements to acquire Plains Exploration and McMoRan Exploration in separate transactions. The completion of each transaction is subject to receipt of MMR and PXP stockholder approval of their respective transaction. We were advised this morning that the SEC declared the PXP filings to be effective, which will enable the immediate filing and mailing of the proxy to Plains’ stockholders. We are completing the process of responding to comments from the SEC staff on the MMR filings and expect the McMoRan filings to be declared effective shortly. We expect both transactions to close in the second quarter.

In connection with these transactions, we completed $10.5 billion in financings during the first quarter. We sold $6.5 billion of senior notes in four tranches in March and also entered into an agreement for a $4 billion bank term loan which will be funded at closing of the transaction.

The weighted average interest rate of these financings approximates 3.1% and we’ll use the proceeds from the financings to fund the cash portion of the acquisition and also for the repayment of certain indebtedness of Plains and McMoRan.

We ended the quarter; we had no borrowing under our $1.5 billion revolving credit facility. We also entered into an agreement with our banks to increase our credit facility to $3 billion upon the completion of the pending acquisition of Plains. FCX currently has $950 million common shares outstanding.

I’d now like to turn the call over to Richard, who will be discussing our outlook and referring to the slide material.

Richard C. Adkerson

Good morning. Like all of you, we’ve been focused on the markets over the past two weeks. Last week, Red, Kathleen and I met our team down in South America, Santiago at the Annual CESCO meeting. Like the LME in the fall, this is a good opportunity to get together with industry, companies, traders, investors, financial people and take a read on the industry. We have been sensitive to and watching the buildup in inventories, the mood down in CESCO was concerned about global growth and increasing supply. And we have significant drop in copper prices $0.20 over the past 10 days or so. I think it’s important to look back at history and remember that these short-term movements can get accelerated by things like consumer buying patterns, material moving into and out of warehouses for inventories and flows of investor funds. When times are good, they accelerate things on the upside and they can accelerate things on the downside.

As we look at the environment today, we walked away from the meetings in Chile with a lot of confidence in the long-term copper markets based on the fundamentals of the world’s requirements for copper longer term and continuing challenges of maintaining supplies from existing mines and also of developing new sources of supply. So it’s – we continue to run our business with a lot of confidence about a positive longer term copper markets. But it’s in times like these when we made these phasing weak markets that the real strength of our company I think comes to the forefront.

With our long life reserves, our geographical diversity, our ability to produce large volumes profitably at low-cost and generate cash flows, we’re financially strong and we’ll talk more about this. This is the way we run our business from everything from environmental responsibility to safety issues. We’ve got a great team and a great set of assets that allow us to operate profitably during weak market conditions and then be there with those assets to make a lot of money as markets improve and we have confidence that they will.

The first quarter is again, a reflection of our team running the business in the way that we planned it. We had strong operating performance. We saw productivity improvements at Grasberg over the last year’s first quarter and throughout 2012. By the end of this year, we’ll be entering into higher grades as our mining gets to the lower ranges of the Grasberg open pit and that will give us a run through 2016. That will be very positive with continuous limited waste movement in access the higher grades.

We made good progress with our development projects. We’ve really completed the project at Tenke now. We’re advancing the Morenci mill expansion and we commenced construction at Cerro Verde. During the quarter, we’ve advanced our move towards our oil and gas acquisition that Kathleen mentioned. We completed debt financing and very favorable returns for the acquisition in a structure that allows us to delever and it gives us a broader access to growth opportunities by investing here in the U.S. and adding assets to our portfolio that have complementary growth profiles as well as cash flows generating characteristics.

On slide 6, the details of what Kathleen reviewed to you and the only comment I’ll make is that the margins, we were affected by some shipping issues in the first quarter. You read about the port issues in South America which delayed certain shipments there and of course, we recognized revenues and profits when shipments are made. We also had some equipment issues at Grasberg, which reduced our copper and gold sales out of Grasberg. Our production at Grasberg for gold was actually 235,000 ounces versus sales of 214,000 ounces, of course, that products going to get shipped as we go forward. Our page seven shows our operating cost structure and this is very consistent with what our guidance was going into it.

We will be affected as we go into the rest of the year by the gold credit at Grasberg and the increase of guidance there from $1.35 to $1.45 is strictly that impact, $0.10 a share by reducing the gold price assumption and the gold price will be whatever the gold price will be. Our cost structure is there. Now, of course, if we go into some environment if where global growth gets constrained as we’ve seen in the past, a lot of our costs are correlated to copper prices and if copper prices go lower, we can expect cost to go lower as well.

When we look at the market, China, of course, remains the important demand driver and that was brought home last week when we saw the market react to the Chinese GMP number coming in slightly below expectation. The government of China continues to express confidence in meeting their targeted GMP growth for the year and as we are doing business there, we’re certainly not seeing any diminishment in demand for our copper concentrates that we ship there and our other products. Chinese growth is likely to drop over time, because the growth levels in the past were extraordinarily high and unsustainable. But the economy has grown so much that when you look at the demand for physical copper based on a larger economy, even with slower growth rates in relation to what the industry can produce longer term, it still indicates a very positive outlook for copper longer term.

In the U.S., growth is slow of course, but we are seeing the copper industry benefit by a healthy automobile sector and improvement in construction and wire demand. There our customers are relatively positive about their outlook. Europe remains weak and as I said, we’ve been watching these global inventories; the exchange stocks as well as the bonded warehouses in China and so forth grow.

The market will work. Overtime, the lower price will encourage consumption, the inventories will work off. And so we look at the underlying economic numbers in China and the world, think about the industry’s challenges in producing supplies and feel confident about our long-term strategy.

We do have a business of where we need to as we executed in 2008-2009 and we’re nowhere near that kind of challenges right now. But we do have the ability of managing our capital expenditures, lowering our production of high cost copper elements and being responsive to market conditions.

Our copper development projects are very attractive at even lower copper prices than we have now. The Morenci expansion is proceeding well and we have a very significant sulfide resource beyond this current expansion that we’re learning more about and gives us optimism about future growth, not only at Morenci, but other mines in the U.S.

Cerro Verde, we’ve been successful in working with the local community and the government in a cooperative way of proceeding with our expansion opportunities there. We’ve gotten our major permits. We began groundwork there and it is underway. We have a very significant potential expansion at El Abra that will require some work because of the challenges that all operators in Chile are facing from water and power issues. But it is a great resource. The world is going to need that resource, I believe, at some point and we are progressing from the pre-feasibility stage there.

We are operating effectively in the Congo and have not had disruptions from any of the issues you read about in the paper recently. In some respects, the government seems to be making progress in the eastern provinces with its issues there. We basically completed our expansion and are going forward and we’re proceeding effectively with our underground development at Grasberg, prepare ourselves for the post open-pit era.

These expansions give us highly profitable economic growth prospects that we have clear line of sight visibility to achieving over the next three years, growing our production by billion pounds a year and adding to our capacity in ways that are economic. I mentioned in Morenci mill expansion, we’re on page 11 now. Today, we have spent roughly a third of the capital required there. We have increased our mining rate. We are expanding our mill, adding incremental production on our higher rate of return basis, and as I said, setting ourselves up for the opportunities for future growth there at that great mine.

At Cerro Verde, we’re expanding the mill from 120,000 tons a day to 360,000 tons a day and that would be the largest concentrating mill operation in the world, increasing the mining rate, doing this on a footprint that’s established in an area where we established in operating and we worked well with the government of achieving a mutually supportive way of having water for this, because of the investments we’re making in Arequipa’s waste water system, which gives us water for our project.

So, so far, we’re making great strides with that and look forward to proceeding with it. And I mentioned Tenke, where we’re adding tank house capacity and increasing production. Those of you who follow this know the challenges we faced within our initial development project there, this started in the spring of 2008, while this one has gone on-time and on-budget.

In first quarter, we set operating records for mining and milling rates in copper volumes. our team there is working very effectively and as I said we’ve had peaceful operations in the last couple of days. There has been some pronouncements out of the government about restricting exports of ores, reproduce the finished product of copper, reproduced the product for cobalt there that involves in-country processing. So these restrictions do not apply to us if they are implemented. Because of the level of cobalt production that we’re achieving at Tenke and the prospects of future growth, we kind of follow the model that our Climax molybdenum team has established in the past and executes now under Dave’s leadership of moving to give us downstream presence and we completed this acquisition of this processing facility in Finland. Our partners at Tenke, Lundin, and Gécamines, the state-owned company of the DRC are partners in this operation and we believe that this provides us the ability to maximize the value of our cobalt resource over time by being involved in the market in a more dynamic and substantive way.

The Grasberg underground development has gone very well even during the productivity issues we faced for mining and milling operations resulted from the strike. Our team was able to stay on schedule for the development of the Grasberg Block Cave and the nearby DMLZ mine, which is underneath and adjacent to the DOZ mine.

Development capital is being spent, progress is being made. The DMLZ mine is scheduled to start up in 2015 with full production of 80,000 tons a day in 2021. The Grasberg Block Cave will start up in 2017 with 160,000 tons a day. That’s 240,000 tons a day of production from the underground using Block Cave mining, which we have been experienced with since early 1980s. It’s not new for us. It’s not something that we have technology advancements to make.

We know what we’re doing and feel confident we’ll do it. It would be a very large underground operation. High volumes, low-cost and it would allow us to continue to having Grasberg as a cornerstone asset of our company for years to come.

Our 2013 outlook remains as we have previously reported. I mentioned that this unit net cash cost that we’re showing is really only reflects the fact that we are now using the lower gold price as our estimate for the rest of the year, that will vary and the effects will be that our team constantly reviews ways of reducing cost.

In this business there is always inherent cost increases that you have to deal with and so when you see us be able to maintain these cost levels, you’re showing the effects of a lot of work of our team in finding ways to offset the increasing cost for managing businesses like ours. And I’m really proud of Red and his team and Mark and our whole organization in what they are doing with that.

At the end of the year, we showed $7 billion of operating cash flows at $3.65 billion copper and $3.25 billion copper that is $5.5 billion. No real changes in the underlying numbers there, just the commodity prices. And we continue to be highly leveraged copper prices each $0.10 change is $270 million.

Capital expenditures are essentially the same. We reduced it, our outlook by $200 million for the next year and move that out two years. As we reported at our last call, we are looking to have growing production profile over the next years as these development projects come on stream. You can see that with the increase from ‘12, ‘13, ‘14 and in to ‘15 and ‘16, and that would generate substantial cash flows for us.

Grasberg, you can see the effect that I mentioned earlier as we get into higher grades towards the latter part of 2013. and then we would be at higher gold production 1.8 million ounces for ‘14 and ‘15 and on a very profitable basis.

The molybdenum sales will reflect our expanded capacity at Climax. We are the market leader in this industry with great resources, great cost structure, great downstream presence and the ability to manage our operations to be responsive to the market requirements for molybdenum.

The year 2013 is a year in which we will be having increasing production as we go through the years, I mentioned driven by the increased production at Tenke, but also the access to higher grades and higher volumes at Grasberg and that really kicks in at the fourth quarter as you can see where we would be going from 950 million ounces, 1 million pounds of copper to basically 1.25 billion pounds of copper and 500,000 ounces of gold.

Our annual cash costs, which I’ve already referenced are consistent with our earlier guidance, and the change reflects the lower gold price, you can see at the bottom of the page, the sales, the sales by region. Page 20 shows the impact over time of our growth opportunities. and you can see that we have strong cash flows at $3 copper, our operating cash flows are roughly $5 billion when we get our additional volumes in 2015, 2016 that would increase by 50% and if copper were to go back to $4 a pound that would go from $8 to $17. So you can see that really significant effects of our growth projects coming into play. the sensitivities, so that you can take your own view with respect to these commodity prices and input levels are presented for your use on page 21.

Exploration continues to be a hallmark of our company. You can see our exploration is globally oriented, roughly 50% in the Americas, 25% in Africa and 20% in Indonesia. We do have a global greenfield project that most of our exploration spending is understanding the resources associated with our existing ore bodies.

The ability to expand on a brownfield basis with the significant opportunities that we have, these aren’t just add-ons of a small size, but to do significant expansion projects in areas of where we are already operating really makes it much more efficient, much easier to execute in terms of permitting issues and community, accepting issues and that’s again, the real strength of our company.

Capital expenditures, now we’re looking at $4.4 billion in ‘13 and ‘14. And then as we completed our projects going into 2015, we’re showing a drop to $3.2 billion. We’re continuing to study the next round of expansion opportunities. That takes time and a lot of work and we’ll be reporting the progress on those as we go forward.

Now with our oil and gas transactions, very positive that we were able to get access to roughly $10 billion of financing and average cost of 3%, I mean that just shows the markets that we’re in. We elected to go ahead and put that in place during the first quarter, because markets were good and we get that issue settled. As Kathleen said, we expect to close these transactions in the second quarter and this gives us in addition to all the great opportunities that we have in our mining business and our exposure to the copper in China through that mining business and the incremental opportunity for investment and growth opportunities in the U.S.

The assets that would be acquired through the Plains and McMoRan transaction have strong current cash flows with strong margins, initially the cash flows will be driven by the oil production from the Plains properties and for the next three years, much of that production is protected from a price standpoint by the hedge program, attractive volume growth profile that it’s almost remarkable how it fits in with our mining growth profile, with very significant exploration potential coming flow through the McMoRan ultra deep exploration program in the shallow waters and onshore Gulf Coast region to and its pioneering effort to drill to very large attractive structures that have not been drilled before, but have the potential of achieving the kind of production that the industry is achieving in the deep water, but doing it in a shallow water onshore environment gives great exposure long-term to the U.S. natural gas business.

and then from Plains exploration focused in large part the deep water Gulf of Mexico where they recently acquired some strategic and very attractive assets from BP during 2012. So what this will do is, add assets that are generating cash, which will allow the oil and gas business to fund its capital expenditure and give our company an expanded growth profile with the benefits of having our geographical profile enhanced by more business in United States and in the business that we understand at Freeport, our management team, our board has had long experience in oil and gas business and in a business where economics are complementary to those in the copper business.

Page 25 shows where the producing assets currently are. I mentioned the Gulf of Mexico deep water of Plains has very attractive. Oil production in California that has established production profile and good margins at today’s oil prices and a very long productive life, they have a very attractive position in the oil shale play in South Texas called Eagle Ford. And then long range, along with potential for McMoRan’s exploration program, which is at those depths that is drilling, it’s targeting natural gas formations, Plains has a very attractive position in the Haynesville shale gas play in North Louisiana.

so we’ve got near-term exposure to oil growth and oil revenues, longer-term exposure to exploration and potential for the U.S. natural gas business and that adds an exciting and attractive asset mix to our company. We factor in the oil business to our growth profile on page 26 and you can see that this opportunity to increase our cash flows and cash earnings by 50%, it continues to be reflected with addition of these oil and gas assets and the opportunities to grow beyond that are really significant.

If you look at the center column, operating cash flow number, which is net of cash taxes and cash interest, you see ranging from $3 to $4 of copper prices. Operating cash flows based on today’s level of operations from $8 million to $11 million growing to $12 million to $16 million, roughly a 50% increase based on our current outlook for growth. And beyond 2016, there is very exciting longer-term growth profiles in the oil and gas assets as well as through our very large reserves and resources that are undeveloped in our copper business. So, very complementary combination of assets and company with experienced management team, and exciting future.

Now, we are taking on significant debt, as a result of this, the closing will have roughly $20 billion of debt and we'll have $4 billion of cash, and most of that cash is located at FCX offshore and will be spent upon capital projects during that period of time. Even though, we are adding to our debt, we maintained our investment grade credit rating from all three agencies and we are effectively able to finance this transaction as a investment grade issuer.

Now looking forward, if we look in the periods of 2013 to 2016, recognizing that because of our growth profile, a lot of these excess cash flows are going to be generated in the 2015 and 2016 periods. If copper prices remain at $3, then we’ll use all of our excess cash flows funding today’s capital expenditure, today’s dividend levels, minority distribution levels, we could reduce the $20 billion of debt down to $7.7 billion. And if copper is above $3.50, basically pay it all off and that’s what we used our funds for.

We would plan to – we would plan to not pay off all of our debt because we believe an appropriate amount of long-term debt on our balance sheet is a good way to lever returns on equity. And so our current thinking is to reduce debt to roughly one-times EBITDA or around the $12 billion level. But I think it’s important as we think about issues relating to near-term weak commodity price levels to look at this slide and think about just what kind of strength we have to deal with that.

And that’s not taking into account our opportunity to manage our business through differing capital, reducing cost and so forth. So we’re very confident about our ability to maintain a strong balance sheet and liquidity position to reduce debt, to invest in projects, to continue our dividend, and in the long-run, to grow our business in ways that we can increase returns to shareholders through higher dividends, perhaps stock buybacks.

On page 29, we kind of take a look back over our shoulder and say what has FCX done over the years? Through our exploration, we found the Grasberg, we developed the Tenke Fungurume project, and DRC when many were very skeptical about our taking on those risks, we resourced the – we added resources through our exploration program that Jim Bob and Rich Leveille and out exploration team focused on. We’ve had a real long history of being disciplined in the way that we manage our finances. We successfully integrated the Phelps Dodge transaction where Freeport acquired a company two and a half times its size with a different culture, but we’ve all come together with a great team. Over time, we’ve had solid financial performance. And you can see from our record of the way we run our business that we do things in the right way.

So we are very positive about our ability to build shareholder values. Those of you who follow us know that our officers and directors are investors in this company and we run this company with a view towards building shareholder value. So, we are very excited about where we are, where we’re headed, and our ability to manage through the time of commodity price volatility and underlying all that is a long-term confidence in our future.

So with that, Jim Bob is here on the line and he and I, and Kathleen, Red, Dave are here to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Sal Tharani with Goldman Sachs.

Kathleen L. Quirk

Good morning, Sal.

Richard C. Adkerson

Sal?

Operator

One moment please. And Sal, your line is now open.

Sal Tharani – Goldman Sachs & Co.

[More from Seeking Alpha: Consider Buying Freeport-McMoRan ]

Thank you. Good morning, guys.

Kathleen L. Quirk

Good morning.

Richard C. Adkerson

Good morning Sal.

Sal Tharani – Goldman Sachs & Co.

I wanted to ask you on the Indonesia, a couple of negotiations you are involved in, one is the negotiations with the government about the extension of COW and the other one is the impending labor contract coming up for renewal in September. I was wondering if, on the government side, if it’s worth negotiating or coming up with conclusion before the election next year, you think it’s better to wait for the new government just in case there is a big change over there?

Richard C. Adkerson

Well, Sal, we’ve been working hard to advance our discussions with the government to deal with its review of our Contract of Work and to get the process of – the extension of our contract formally approved by the government. As you know, our contract provides us rights to extend the contract on its existing terms beyond its original term ending in 2021 to 2041. We believe it would be best for all of us, the government of Indonesia, the province, the workforce, and everyone to get these issues resolved as quickly as possible, and we have been working towards that end with that goal.

The government officials have expressed a similar goal and we've had productive discussions, but the process has not been organized in a way that has led to a conclusion yet. We are continuing the discussions. I will tell you we've made progress in finding some mutual acceptable ground on a number of the issues and you’re right, the election is for the President, it is scheduled for next year. At this point, Indonesia is an established country with a democratically elected government. And so there is expected to be a continuity in the way the company operates and deals with investors like ourselves. So we’re going to continue to work to get this done as quickly as possible and recognizing the challenges of getting decisions made as we get closer to the election.

Sal Tharani – Goldman Sachs & Co.

And how about the labor side, have you started working…

Richard C. Adkerson

The labor side, okay, excuse me. The labor side is – the union is now getting organized under Indonesian law. There has to be new CLA agreement, labor agreement every two years. And our current contract expires this fall. The formal process of discussions begins May 1 and the initial process is one of exchanging information and having interaction with the union leadership. And so the union and ourselves are getting prepared for that. Union leaders, community leaders and others are all visioning a goal of awarding a strike this year and that’s certainly our objective and we will begin that process formally on May 1.

Sal Tharani – Goldman Sachs & Co.

Thank you very much.

Operator

You next question comes from the line of Paretosh Misra with Morgan Stanley.

Paretosh Misra – Morgan Stanley & Co. LLC

Hi, guys. Two questions; one, as you look ahead the under pending merger, do you think – are there any non-core assets in your current portfolio that you perhaps would be open to divest?

Richard C. Adkerson

Well, we over time always review assets, see what make sense and what doesn’t make sense. At this point, we have not made any decisions to sell the assets. We like the mix that’s there. And so there is nothing that’s been decided yet, the target in any particular sales, but we will be working with our management team and our Board to assess what would make the best structure going forward.

Paretosh Misra – Morgan Stanley & Co. LLC

Got it. And then second and last, on Cerro Verde, could you talk a bit more about your capital spending plans? In other words, what are the major spending years, 2014 or ’15?

Richard C. Adkerson

Yeah.

Kathleen L. Quirk

Well, Paretosh, this is Kathleen. The CapEx will be spent – now that we’re in construction, it will be spent over the next ’13, ’14, ’15 kind of evenly and will complete the project towards the end of ’15 or early ’16 to get to the rates. But in terms of what’s left to spent, I think you can assume, it’s split over those years equally.

Paretosh Misra – Morgan Stanley & Co. LLC

Got it. Thank you very much.

Operator

Next question come from the line of Oscar Cabrera with Bank of America Merrill Lynch.

Oscar Cabrera – Bank of America Merrill Lynch

Hi, thank you, operator. Good morning, everyone.

Richard C. Adkerson

Good morning, Oscar.

Oscar Cabrera – Bank of America Merrill Lynch

Richard, just wanted to, first, verify the numbers that you provided for the throughput in Grasberg. You said 2015 for the DMLZ (inaudible) Grasberg. What were those numbers again please?

Richard C. Adkerson

Yeah, in rough terms, it would be a ramp up of DOZ extension and the Deep MLZ, that would end up achieving 80,000 tons per day. Now that’s really the current capacity of the DOZ mine. But we are moving to a resource that’s deeper and adjacent to the DOZ mine and fortunately the initial production from there comes from a section that has very good grades. And so that will help us during the period that we’re transitioning from the open-pit to the Grasberg Block Cave, which lies underneath the open-pit.

We currently expect to complete mining in the open-pit, but at the end of 2016 approximately and then over the next four years or so we would ramp that up to 160,000 tons per day and that actually comes from two headings in the Block Cave. In some ways, it will be like having three mines that are currently comparable to what we're doing in the DOZ.

Oscar Cabrera – Bank of America Merrill Lynch

And also basically, the plan hasn’t changed. Thank you for that. And then getting back to the issues that the Government and DRC put forward requirements that they have, could you just walk us through what they're asking? My understanding is that they want higher value added in the products leaving the country. You guys are producing copper cathode. But you don’t think that the hydroxide that you’re producing in cobalt, that presumably is going to be exported to your new operations, will be affected by these changes. Can you just walk us through…

Richard C. Adkerson

Okay Oscar, one issue that the DRC looks at and this was also an issue in Indonesia, which led to the 2009 mining well. For certain types of minerals and in the DRC applies to some copper, people are exporting ores. They are just mining the ores and sending it to other countries for smelters and sometimes to the small smelters in the DRC. A lot of the ores will go in to Zambia and in Indonesia, you saw nickel and tin ores going to Japan and the countries say we want to see processing facilities in our country.

Now in the DRC, we produce copper cathodes through our FXCW process and that’s a finished product. We produce this intermediate product which is a processed product, cobalt hydroxide and with our move into the processing facilities in Finland, we now have as a partner in that the Gécamines state – mining company, and so we are very comfortable that we’re not the target of these types of restrictions because of what we're doing there.

Oscar Cabrera – Bank of America Merrill Lynch

Okay, understood. Thanks a lot for the clarification.

Richard C. Adkerson

Thanks, Oscar.

Operator

Your next question comes from the line of Brian Yu of Citigroup.

Brian H. Yu – Citigroup Global Markets Inc.

Great, thanks and good morning. Rich, I think last quarter you guys had mentioned that in Indonesia, you were still finding some issues with the panels. I’m wondering it looks like from your guidance that it's unfolding as planned. I just wanted to confirm that as you guys get deeper in these panels, that there isn’t anything particularly surprising coming up?

Richard C. Adkerson

Yeah, if you look across all of our metrics when we talk about productivity increase, you can see a higher mine rate in open pit. You can see a higher mine rate in the DOZ underground mine, higher mill rate, higher concentrate production, all those things are heading in the right direction. In the DOZ mine, we are getting to 60,000 to 70,000 tons a day, our capacity is roughly 80,000. So everyday, there’s issues that our guys are dealing with, but there is nothing that’s changing our outlook for continued progress and that’s what you’re seeing in our numbers.

Brian H. Yu – Citigroup Global Markets Inc.

Okay, great. My second question is, on the site production and delivery costs, guidance is still the same at $1.89. but there’s some material movements across the regions, so for example, South America, site production and delivery costs are coming down quite a bit, while Africa is moving up. I was wondering if you can comment what’s happening maybe in those two that seem to have more material changes in the cost outlook.

Kathleen L. Quirk

Brian, this is Kathleen. You’re right. On a consolidated basis, $1.89 is similar to as what we had previously on a consolidated basis. but there was some movement between the various regions in Africa. Our unit costs are, we’re estimating to be higher for the year. and that’s primarily a function of sulphuric acid costs; purchased sulphuric acid costs are higher than what we had previously modeled. As you are aware, we’re putting a sulphuric acid plant in 2015 that will enable us to reduce our acid cost. So we are modeling higher purchased asset cost than what we had previously.

In South America, the decrease is related to some energy contracts principally where we’ve had modeled some higher energy costs in our plan and have achieved some better results. So that’s a factor in South America. we had some slight increases in North America and Indonesia that offset. But net of all those things, the consolidated numbers, $1.89 is the same. And then really when you cut through with the big change was the gold byproduct credit at Grasberg where we were previously expecting something close to $1.95 of byproduct credits and now we’re down to $1.66, which works out to $0.10 on a consolidated basis.

Brian H. Yu – Citigroup Global Markets Inc.

Okay, thank you.

Richard C. Adkerson

I just want to say, two weeks ago as we do before, at the end of every quarter, Red had all of the senior operating guys here for a meeting in the Americas, and I really want to compliment Red and his team for this focus they have on really looking at cost. I mean it’s one which is, it’s a real challenge and you see that throughout the industry, particularly at mines age and our mines in the Americas for the large part of our older mines. and so that means issues keep coming up. And this mining is a tough, tough business as we can see by the problems that Bingham Canyon is facing right now. But we’ve got a culture here. Markets are markets and at the end of the day, it drives a lot of our profitability. But we’re a commodities company. And so the culture that we have of really looking for cost in these older mines where it’s not like the Grasberg and if you can just break through these high grades is really something that’s built into everything we do. and Red and his guys did just a great job with it.

Brian H. Yu – Citigroup Global Markets Inc.

Maybe, Richard, a quick follow-up on that, on the cost side, it seems like we are finding that on mining, maybe less CapEx does seem to decline. At the same time, you’ve just got secular increases in the industry, because of grades and depleting mines. but more on, and maybe the EPCM equipment, are you seeing any kind of cost release coming through as more and more of mining companies start to maybe rationalize projects?

Richard C. Adkerson

You’re seeing availability improved from contractors, from suppliers, from personnel in the industry and that’s going to be a continuing factor as we see all these cutbacks that companies are making in their capital spending and their operations. So the answer is yes, one of the really serious talks we had with our team is to make sure we take advantage of it. And to look for opportunities to pick up people in areas that we’re short in, to use contractors more efficiently and take advantage of supplier costs whenever we can. We had great relationships in the industry. And so we’ll be able to do, achieve those things. Those are all things at the margin, things at the margin on what ends up making a difference. Heard a lot of talk in Chile, I mean, I’m sure you read the things about the competitiveness of mining in Chile right now (inaudible) similar situation in many respects versus mining in the U.S. and so these assets that came through the Phelps Dodge transaction increasingly look attractive.

Kathleen L. Quirk

Next one.

Operator

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

John Tumazos – John Tumazos Very Independent Research, LLC

Congratulations on the rise in the natural gas price. With the rise in the gas price, do you think more U.S. energy acquisitions are still possible? I read the energy stocks fell with other commodity stocks even though gas is higher first question. Second question, would you hedge copper prices? Third question, how far out in the CapEx planning horizon, do you have flexibility to reduce CapEx of copper prices where it keeps falling? Would you look at 2016, 2017 projects as opposed to 2014 spending?

Richard C. Adkerson

Okay. well, John…

John Tumazos – John Tumazos Very Independent Research, LLC

Forgive me for being interested.

Richard C. Adkerson

I don’t even know how to respond to that. You have good questions, we’re all interested. John, we like the position that we have in the natural gas industry that will come to us with the Plains and McMoRan acquisition. Plains had a position, a significant position in the Haynesville Shale play, which because of its cost structure is a play that’s uneconomic at lower prices, but becomes very attractive as prices rise. and so that is a good position I have. And then with McMoRan, it has a very positive attributes in terms of its access to very large potential production reservoirs that will unfold over time. and we think the timing of the way that the McMoRan story will come into play, plus having the position in the Haynesville gives us a very attractive position in the natural gas business and the ore business.

So initially, we’re going to be focused on executing our financial plan of integrating the companies of managing our debt level to get it down as we go forward. Our management team and our board will have the opportunity to look for investments over a broader set of assets and look to where we can get the best returns. So we’re certainly, as we do in the mining business, we’ll be alert to all potential opportunities.

With respect to hedging copper, we fundamentally believe that we can manage price risk through the way we manage our portfolio of assets, the way we’ve structured it, the way that we have the ability to deal with capital expenditures like you talked about shows the ability to defer capital. If we have to, we could do that again. We also have the ability to manage our margins and our costs by the way we run certain of our operations.

You may recall that at Morenci in third-quarter of 2008, we had unit operating costs that were nearly $2. Within four, five months we had reduced it to $1.20. Now that reflected the lower input cost, which if the copper price does ramp down, input costs are going to be ramping down because of the way that the correlation between the economics between copper prices and input costs. But we basically have a philosophy of managing price risk in the mining business through operating hedges as opposed to financial hedges.

And with CapEx, you’re right. If we have to, we have the ability to defer CapEx going forward. The good thing about our opportunities is that we really have the rights to do that. We’re not compelled by contracts with the government and so forth or other outside parties that force us to spend money at particular points in time. So that gives the flexibility on how to manage cost.

John Tumazos – John Tumazos Very Independent Research, LLC

Thank you.

Richard C. Adkerson

Thanks, John.

Operator

Your next question comes from the line of Tony Rizzuto with Cowen Securities

Anthony Rizzuto – Cowen Securities

Hi, everyone. I’ve got a couple of questions here. The first one is, how should we think about the Cerro Verde output before the mill expansion comes online in 2016? I know the grades were lower in 2012 and output was down year-on-year. But should we be building in further grade declines as we model the next couple of years?

Richard C. Adkerson

Well, Kathleen is taking a look through her book here to answer your question specifically. I will say that that’s all built into our numbers that we give you. I mean, as we give you volumes going out for the next three years, that factors in what we expect to produce at Cerro Verde.

Kathleen L. Quirk

Yeah, Tony, it’s Kathleen. We’re showing slightly lower production in 2014 compared with 2013 at Cerro Verde. And then it starts to increase in late 2015 when we get the concentrator in place. So we would have had and I think we have a slide that shows that. We would have had declines at Cerro Verde if we weren’t doing this expansion. We’re still bringing on incremental volumes. But we were facing declines in grades if we didn’t and loss of the oxide deposit as we go forward. So that’s all reflected in our numbers that we’ve given you the outlook on.

Anthony Rizzuto – Cowen Securities

Thanks, Kathleen. Is that decline would be of a similar magnitude to the decline we saw in 2012 or less than that as you’re modeling right now?

Kathleen L. Quirk

We’re modeling about 10% lower in ‘14.

Anthony Rizzuto – Cowen Securities

Okay, okay. And then just a follow-up on DRC and appreciate all the commentary there. And I was wondering, I know you’ve also got a labor expiry there as well. is there any potential here that the government may look to try to tie-in something along these lines with the cobalt hydroxide along with labor negotiations there, is that a risk do you think?

Richard C. Adkerson

No, I don’t see that as a risk at all. We have great relationships with the workforce. We haven’t had any sort of really significant issues. When they have issues that are important to us, we respond to them. And the government has been very supportive. That’s a country where people really appreciate jobs and the government appreciates employment. So we haven’t seen any attempts to try to tie-in labor relations with government policy issues. And in fact, Tony, I’m just real pleased with the way we’ve conducted business there. The provincial government, the central government are all very supportive. now having said that, the government is constantly trying to extract money form us in terms of the way they interpret our contract and regulations and that’s an ongoing issue. But that’s just a function of the status of the government. But our relationships with the leadership, its province and the central government have really improved dramatically over the past couple of years.

Anthony Rizzuto – Cowen Securities

That’s great insight, Richard. I appreciate that, and that’s Kathleen too.

Richard C. Adkerson

Thanks, Tony.

Operator

Your next question comes from the line of Brian MacArthur with UBS.

Brian T. MacArthur – UBS Securities Canada, Inc.

Hi, good morning. Just following a little bit up on what Tony was talking about. Can I ask the same question on El Abra because first quarter looked really good, you did 90 million pounds, but my understanding was as we transferred over, which is going down to a run rate at 300 million pounds over the next few years. So is it possible just to get the sort of profile on that too?

Kathleen L. Quirk

Yeah, El Abra, we are expecting in the 350 million pound range for this year and it’s similar next year. 2012 we had sales of 340 million pound, so we are kind of in that range up over the next few years.

Brian T. MacArthur – UBS Securities Canada, Inc.

And will that be like sustainable long-term i.e. higher than original, I thought originally when we converted all over sort of more replacing at 300 you used to talk about. Will it be higher than that on a sustainable basis going forward now do you think?

Richard C. Adkerson

We're going to try and hit as much as we can, I mean, that's just the way we are and I think that's what we're reflecting in achieving these higher rates going forward. I think looking beyond that, we ought to just think about it in terms of replacing that 300 million pound level and we'll give you the outlook. Red, do you have any comment on that?

Harry M. Conger

No, that's the level that we're at those. Those grades are consistent pretty much for the Sulfolix project.

Richard C. Adkerson

Yeah.

Brian T. MacArthur – UBS Securities Canada, Inc.

Okay, great. Thank you very much.

Richard C. Adkerson

Thank you, Brian.

Operator

Your final question comes from the line of Garrett Nelson with BB&T Capital Markets.

Garrett S. Nelson – BB&T Capital Markets

Thanks. Most of my questions have been answered, but I did want to ask about the dividend policy. Can you definitively say that under no circumstance would you cut the $1.25 dividend? And that even if copper and other commodity prices were to decline materially, you'll extend your debt pay down timeline and/or defer CapEx before you'll trim the dividend. I'm noticing that the stock is yielding about 4.5% right now, which is a tight yield and sometime, which I think is compelling to a lot of current and perspective investors.

Richard C. Adkerson

Garrett, we’ve been working around these commodity business for a very long time and so to say never is not something that I will think about. Never is just too strong a word. Now having said that, we are confident about our ability to maintain that dividend. We recognize that it is attractive to investors. When our board made the decision to set it at that level, it was set at a level that was looked at in contemplation of lower commodity prices than the $4 – where it was when we set it and lower prices than where we are today.

So we have a commitment to it. I don't think any natural resource company can say definitively that you never do it, because we can all look back in history and see where companies have all had to make adjustments for a difficult scenario. But we do have a confidence in the commitment to it.

Garrett S. Nelson – BB&T Capital Markets

Sure, I mean it seems like the dividend is well covered even at much lower commodity prices.

Richard C. Adkerson

And that’s the way we looked at it when we set it at that level.

Garrett S. Nelson – BB&T Capital Markets

Okay. Thanks very much.

Richard C. Adkerson

Okay, Garrett. Thanks.

Operator

Thank you. I’d now like to turn the call back over to management for any closing remarks.

Richard C. Adkerson

All right. Well listen, we appreciate everybody’s attention. we look forward to executing our business as we go forward and dealing with these markets, however they might turn out. Always with a really optimistic positive view of our business in the longer-term. So thank you for your participation.

Operator

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

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