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Edited Transcript of FCX earnings conference call or presentation 25-Jul-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Freeport-McMoRan Inc Earnings Call

PHOENIX Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Freeport-McMoRan Inc earnings conference call or presentation Tuesday, July 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harry Milton Conger

Freeport-McMoRan Inc. - President & COO of Americas

* Kathleen L. Quirk

Freeport-McMoRan Inc. - CFO, EVP and Treasurer

* Mark J. Johnson

Freeport-McMoRan Inc. - President of Indonesia and COO of Indonesia

* Richard C. Adkerson

Freeport-McMoRan Inc. - Vice Chairman, CEO and President

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Conference Call Participants

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* Alexander Nicholas Hacking

Citigroup Inc, Research Division - Director

* Christopher Domenic Mancini

G. Research, LLC - Analyst

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* Fawzi Hanano

Berenberg, Research Division - Analyst

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Lucas Nathaniel Pipes

FBR Capital Markets & Co., Research Division - Analyst

* Michael F. Gambardella

JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

* Novid R. Rassouli

Cowen and Company, LLC, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Second Quarter Earnings Conference Call. (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.

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [2]

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Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan Second Quarter 2017 Earnings Conference Call. Our results were released earlier this morning, and a copy of the press release and slides for today's call are available on our website at fcx.com. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page 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 will include forward-looking statements, and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings.

On the call today, Richard Adkerson, Chief Executive Officer of FCX; Red Conger, President of Our Americas business; Mark Johnson, President of our Indonesian operations; and Mike Kendrick, President of Climax Molybdenum. I'll start by briefly summarizing our financial results, and then turn the call over to Richard who will review our performance and outlook using the prepared slide presentation. As usual, after our formal remarks, we'll open up the call for questions.

Today, FCX reported net income attributable to common stock of $268 million or $0.18 per share for the second quarter of 2017. The results in the second quarter include net gains of $27 million or $0.01 a share associated with a number of special items, which are detailed on VIII of our press release. After adjusting for these net gains, second quarter adjusted net income attributable to common stock totaled $241 million or $0.17 a share.

Our EBITDA or adjusted earnings before interest, taxes and depreciation for second quarter totaled $1.2 billion. We've got a reconciliation of our EBITDA calculation on the last page of our slide deck.

Our sales for the second quarter totaled 942 million pounds of copper, 432,000 ounces of gold and 25 million pounds of molybdenum. Our sales volume for copper were about 3% below our April 2017 estimates that primarily reflected the impact of the worker absenteeism on our mining and milling rates in Indonesia. The second quarter average realized copper price was $2.65 a pound. That was over 20% above the year ago quarter average of $2.19 per pound. And gold prices averaged $1,243 for the quarter.

Our average unit net cash cost on a consolidated basis averaged $1.20 per pound of copper in the second quarter. That was lower than the unit net cash cost of $1.33 per pound in the second quarter of 2016, and it was also in line with our guidance.

Operating cash flows during the quarter totaled $1 billion. Those exceeded our capital expenditures of $362 million in the quarter. Year-to-date, we've generated operating cash flows of $1.8 billion, which have exceeded our year-to-date capital spending of $700 million.

At June 30, our consolidated debt totaled $15.4 billion and we ended the quarter with $4.7 billion in consolidated cash. Net debt is $1.1 billion lower than the start of the year and notably, $9.5 billion less than the start of 2016. We had no borrowings under our revolving credit facility and approximately $3.5 billion available at the end of June. At June 30, FCX had $1.45 billion common shares outstanding.

I'd now like to turn the call over to Richard, who will be using the slide presentation materials on our website.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [3]

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Good morning, everyone. Want to give you an update of where our company stands right now. I've got to tell you, we've had a -- we have high degree of optimism about our businesses. We're here in the midst of 2017. As we do before every earnings call, we had our global operating team together. Last week, Red Conger is here, Mike Kendrick is here and Mark Johnson is on the call. And our team is really focused, continue to execute our plans. We're looking forward to the future and now analyzing where our company is going to ultimately grow from these great sets of assets that we have. But we've all focused on cost management, and you can see the results of that, good achievement with that. We've got ongoing capital discipline. We've got a portfolio of growth projects that we're doing work to prepare ourselves for future investments. But we're not committing to projects now, which is common across the copper industry worldwide. There's still enough of uncertainty in the global economy that's keeping people from going in and investing heavily on growth projects. But we got a good set of them that we're going to be prepared to invest in the future, and we're convinced that the world's going to need that copper.

We have some issues to continue to talk about in Indonesia, but we've made a lot of progress there. And we've -- we do have a degree of optimism about our work with the government, about, operationally, how we're dealing with our labor issues that's been issues far as during the first half of the year and making progress.

Kathleen pointed out that we have reduced our debt since we set our targets in early -- going into 2016. At that time, we said we were going to try to reduce debt by $5 billion to $10 billion over the 2-year period ending year-end 2017. Today, there's been $9.5 billion. As Kathleen said, to date, we've generated significantly higher cash flow than our capital spending. We're over $1 billion. So we've already achieved our target. We're going to continue to generate cash to reduce debt. And now that our balance sheet issues, which dominated our activities last year, are resolved, we are focusing on operations and looking at safety issues, which has always been at the top of our list of things, being more efficient. The primary strategic issue we faced is resolving the long-term rights in Indonesia, and I'll be talking about that. But we're also focused on building long-term values in our portfolio of copper assets, and we are optimistic about the future of copper as a commodity and its future price. I'm very well pleased that after going through the efforts to reduce debt, we retained a set of assets that are really attractive in terms of building our company around. We do have now $8.2 billion in liquidity, looking at our cash and our availability on our revolver. So we continue to generate cash, allows us to improve our balance sheet.

Today's a good day in the copper market. I can't tell you how many days we've had earnings call when we wake up in the morning and say, we wish we had higher copper price, but today is a good day. We're not surprised by this at all. The market fundamentals remain solid. What we're seeing is in the face of a stronger U.S. dollar. Chinese demand is better than most expected during the first half of 2017 and now. As I was coming up in the copper business, we always talk about the summer doldrums. I mean, just historically, as you went into the August in the copper industry, you typically saw demand fall off, inventory rise. Well, we're in the summer doldrums. It's typically not a great time for demand in China. And so it's encouraging to see this, to see European demand improving, North America growing at a low rate. But the fundamental support forward is the supply side issues, and that's coming clearly in the focus. We're seeing a return to more typical disruptions. We had a period of time of where disruptions were lower than historical amounts. We're seeing now issues related to labor, technical issues, issues with government and also forward that's been supportive from a supply standpoint. There remains a scarcity of major new projects available to the industry. The projects that are available longer term are lower quality than historically were available. And so copper is very well placed among commodities because of the role of copper in the global economy, the supply side, the supported things and also the uses of copper that are emerging in terms of the development of alternative energy sources and ultimately, with mechanization of the economy, including electric vehicles.

So copper has a solid fundamental outlook. Our company is well positioned with the assets that we have. When Mackenzie shows, even with the modest demand growth of 1% globally per year, they estimate 5 million tons of new copper projects will be required to meet demand from the supply situation that we face. Now we know because we're studying this every day, that new copper projects and ours that we have, our greenfield -- I mean, brownfield projects using existing infrastructure, low-risk execution projects, and we showed what we can do with the Cerro Verde project, but we know that they require $3-plus copper to make them justified. There's a 7- to 10-year lead time, and greenfield projects are really scarce. So there's a deficit looming, absent any big disruption in the world's economy or in China. There's an inevitable deficit that will allow our company to really profit from it. I've read some recent reports of people who have been bearish on copper outlook for some time now that are talking about prices being required for new projects as being substantially lower than we see in our portfolio, and we believe we have the best portfolio in the industry to go forward. So anyway, we're encouraged by that.

Talking about the Americas operations, strong operating performance. The Cerro Verde expanded operations continue to perform well. We're looking at a project near our Safford mine in Eastern Arizona, where we have an ore body that some of you recall us talking about in the past call, Lone Star. As the Safford mine is depleting from the oxide minerals that we have there, we're pointing towards a plan of producing oxide from the Lone Star deposit, which would make use of these facilities that we have available, and also serve -- to expose a very large sulfide resource at Lone Star that underlies the oxide ore bodies. Using existing infrastructure, this project would be easy, relatively easy with -- reminisce a little bit when I say that, but relatively easy to undertake and give us the opportunity for some significant investments in the large sulfide resource, both at Lone Star and at Safford in the future.

In Chile, at our El Abra project, we're partners with CODELCO. Our exploration that we've done over the past 10 years, we just celebrated our 10th-year anniversary with the Phelps Dodge deal, have identified a very significant sulfide resource that we didn't know existed at the time of the transaction. This would be a Cerro Verde type project, although it would require a desalination plant and pipelines to get the water to heights. It's a big project, but it's a very attractive project in the long run, and we're working with our partner, CODELCO, and other resource landowners in the area to hit up for future investments.

And then in the U.S., we have a whole series of sulfide opportunities that we're continuing to study. I want to -- we're serious about this. I mean, we believe we'll make these investments in the future. We're just not making them right now because as we assess the market.

On Slide 6, we have, in alphabetical order, these projects that we have available in our -- in the Americas, they -- outside of Lone Star. They are in the United States. United States has strategic benefits today that it didn't have in the past, part of this -- other than El Abra. Because of the energy situation here, which is an advantage for the U.S. with shallow oil and gas development, the labor situation here is we don't have unions in United States. We have communities that support our business. And so it's an attractive place to invest. And the resources, as you can see in these charts where we've got significant, currently identified proved and probable reserves. The mineralized material and the resources beyond that are enormous. So this will be where we'll be focusing the future of our company on.

So in Indonesia, our exports resumed in April. We experienced a high level of worker absenteeism during the second quarter that actually began in mid-April, and that had an impact on our mining and milling rates. Despite the lower rates, we have been mining higher ore grades and we had the ability to sell from inventory that built up during the time that we were restricted from exports. We had a significant reduction in our workforce there. Workers that were absent were given notice as required under our labor contract and under Indonesian law. Many of those did not return to work, and they were deemed to have retired -- to have resigned. And we are now in the process of using contractors to supplement our workforce by this significant number of people that are no longer employees. You read about calls for strikes. We want to say that there is no general strike. We went into the year with over 30,000 workers, over 25,000 of those were not involved in this absenteeism. They continue to work. And so we are using this as an opportunity to really deal with some workforce issues that have been with us for some time now, and we're encouraged that we'll be able to do that. We've got support from the authorities. It's been peaceful. And we are working our way back towards normal operations. We're looking at ways of improving our operations through slope optimization efforts, and we are looking at accessing what was designed to be produced from the underground Grasberg Block Cave through open pit mining. So we're actually feeling good about where we are right now. The team's done a great job in managing this adjustment in our workforce. We had, for example, about 4,000 of these workers that were deemed to have resigned.

Now in terms of the contract issues with the discussions with the government of Indonesia, those are very active right now. And we're now approaching a stage where both parties have expressed an objective of a near-term resolution, and I believe we are seeing that objective being more clearly identified by the senior levels in the Indonesian government than we have seen in the past. Our team in Jakarta has been working in a process that we established back in May to have discussions with the ministries that are involved in this and our team. We are now at the point of moving those discussions to direct discussions with the lead ministers and with the government. I'm personally involved in those as I have been all along with the process. We're going to be talking about mutual objectives of extending our operating rights, providing Freeport the required assurances about fiscal and legal terms that would give us the confidence to invest in these big underground projects that we have in our plans. We are being responsive to the goals of the Indonesian government about divestment and about smelter investments. We have an understanding that any divestments that we have would have to be a fair market value for -- from our perspective and that Freeport would continue to have operational and governance control over the operations. So we're moving to the next stage. We have a mutual sense of optimism that we can find an agreement. At the end of the day, it's in all of our interest. It's the interest of the country, our shareholders, the workers, the province of Papua, and so we will -- we are working on that everyday.

We did -- we do have an issue that we need to -- that affected our outlook near term. So we are developing -- we were starting up a -- our most recent extension of our underground mine where Freeport had been conducted block caving operations since the early 1980s, and we keep going deeper. The recent ore from this section of our operations has come from a mine called the Deep Ore Zone mine called DOZ and we've extended that through our exploration activities to a lower horizon, and we call this new mine the Deep MLZ. And as we've gone deeper, we've encountered a different rock environment than we had at shallower elevations. The rock is more dense, harder. We're going deeper. And in June, we experienced what we are calling a mining-induced seismic activity, which is not uncommon in block caving mines. We've had it in the past, but this is -- was a more significant event for us. It has caused us to slow down the initial ramp-up to make sure that we're managing this rock stress in a safe way and in a prudent way to protect the people and the resources in our underground development until the cave is sustained in a normal fashion. So we had a plan going into the second quarter for ramp-up that now we are slowing down as we deal with the situation. We still -- there has been nothing that has affected the resource that we're developing, and nothing for us to change our plans to ramp this mine up to 80,000 tons a day, which is very large for our block-caving operations by 2021. But it is resulting because of this slowdown and based on what we know today and deferrals that we've incorporated in our plans, which is reducing our metal by 100 million pounds of copper this year, 200 million next year and also deferring gold as part of the component of this.

A couple of points about this. This is -- as I said, this is an extension of an ore body that's not part of the Grasberg ore body, but this is an ore body that we begin mining in the early 1980s and have kept extending it. At depth, the ore body underlying the Grasberg is the same ore body we've been mining from the open pit. And its rock characteristics are much different. We're real comfortable that this situation we have here will not automatically transfer over to the Grasberg because of the nature of rock differences. Any event, we are working with a world-class team of geologists and engineers, and we're putting safety first. And -- but we're looking for ways of advancing this. And once we get to the point of having the caving operating in a normal fashion, then we'll be back on track to our original plans and nothing's changed that. So we'll be talking a lot as we go forward about the block caving designs as Grasberg Block Cave is just amazing in terms of its size. When this is completed, this will be the world's largest underground mining operations, and we're very comfortable that we can manage this.

You can see it has almost -- the Grasberg Block Cave has almost 1 billion tons of reserves with over 1% copper and 0.78 grams per ton of gold. It's extraordinarily high rate of returned investments. The Grasberg Block Cave, for example, is bigger than the Morenci mine, which is our flagship mine here in North America. It's state-of-the-art systems. Block caving is complicated operations, but we are very experienced with this, and it's going to be a real source of pride for not only for our company, but for the country of Indonesia in having this kind of development.

This Slide 10 shows you the history of block caving. This is a separate mineralization from the Grasberg Block Cave, separate from the original Ertsberg deposit, which Freeport gained mining in the early 1970s. But it began with a mine that's called the GBT, which is depleted by the late 1970s. The late 1990s, we're developing the IOZ mine, which has depleted. We moved to the DOZ. And now this is, as you can see -- proportionally, this is a larger high-grade ore body called the Deep MLZ mine, and that's where we're dealing with the start-up issue.

With our negotiations advancing in a positive way with the government, we are dealing with a number of ministries. We're all focused on the financial benefits to Indonesia that our operations provide. We've been there a long time. We've contributed $60 billion to the national gross domestic product since our current contract was signed in 1992, a very significant part of the region. And the regions where we're located, we're over 90% of the economy. By far, the largest employer in Papua, one of the largest taxpayers. We contribute through our community programs, a very significant amount, almost $700 million since we started this 1% fund in 1996. So both sides are working now constructively towards a solution. The challenge we're going to face is to take this mutual objective of finding a solution and converting it into an agreement and supporting regulations that's acceptable to both parties. That's not underestimating that, but we are approaching this with a degree of optimism. And it's clear that the senior government we were working with to have that objective as well.

2017 outlook is presented on Page 12 with the adjustments because the Deep MLZ start-up issues, we're now projecting copper at 3.7 billion pounds, gold at 1.6 million ounces and 93 million pounds of molybdenum. Site production delivery costs are in line with our previous estimates. And after by-product credits, we're now suggesting $1.19. Operating cash flows will continue to be strong and capital expenditures will continue to be significantly lower than our cash flows.

Sales profile is shown for '16, '17 and '18 on Slide 12 -- Slide 13, I'm sorry. And you can see this is now net of the sale of our Tenke mine that we sold in the Congo to China Molybdenum and the incremental interest in Morenci that we sold to our partners, Sumitomo. So that's what our sales look like.

EBITDA and cash flows for our 2018 now at $1,250 gold, $7.50 molybdenum and copper prices varying from $2.50 to $3 are shown on Slide 14. You can see that goes from just over $5.5 billion of EBITDA to about $7.5 billion over that range and with cash flows going from $3.4 billion to $4.8 billion. We're highly leveraged to copper, each $0.10 is $280 million. And for this call, we're close to $0.10 up today.

Capital expenditures show the termination of capital spending in the oil and gas business, and we currently are continuing to invest in the Grasberg Block Cave, which has, for '17, $700 million of investment and $750 million for 2018. With agreement with government of Indonesia, we'll proceed with that. If we are unexpectedly unable to reach an agreement with the government, then we would take the steps of stopping that spending. It'd be a major adjustment to our activities at PT-FI and would have a deferral in the ramp-up, which, in block cave mining, it takes a period of time to ramp up once you start the mining operations, which we can't do at the Grasberg Block Cave until we finish mining the open pit. So our current plan is to do this. If we were not to be successful in our discussions with the government, those CapEx would be suspended, major adjustments in our operations and we would be moving on to a resolution through arbitration, which we don't want, the government doesn't want. That's why the momentum is to find the solution, and that's what our plan is based on.

Kathleen and her team did a great job in amending and extending the Cerro Verde credit facility, the details of that on Page 16 as we go forward. We will continue to look for steps of managing our balance sheet and our maturities over long periods of time. It was a very highly successful syndication and it reflects the strength of this great asset. And one of the -- maybe the best thing that came out of this asset restructuring and capital-raising activity that we did in last year was that we kept Cerro Verde and we're building our company around it as we go forward in the future.

You can see our debt reduction is going from over $20 billion to net debt, now being $10.7 billion and then where that would move to with just using cash flows. We're no longer looking at any kind of capital raising through sales of stock or sales of assets. We'll do some small sales of assets in an ordinary course of business. But as I said, we've basically reached our goals with our balance sheet. And now we're focused on safe production from our current sets of assets with this great team of operators and development, and we've got the financial strength to go forward. And we're focused on resolving the situation in Indonesia, and we currently believe we're seeing good progress with that and then looking for the day of when the market will be such that we'll be investing in growth in our assets and looking for opportunities outside of our company. We're all focused on building shareholder value. That's all we're about, and we'll look for alternative ways of doing that because that's our job at the end of day.

So with that, we will open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Chris Terry with Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [2]

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Couple of questions from me mainly relating to Grasberg as you'd expect. First one, just on the underground development. You'd hinted that, that was your plan balancing act there during the year of keeping enough up labor in place so that you don't stop completely. When you say it's been slowed now, is there a different development compared to last quarter? Or is it more the same? And then also, can you just speak a little bit more about the opportunity to mine from the open pit part of what would have previously been in the underground?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [3]

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Okay. So with your first question, I want to make sure that we're clear on this. There is the block cave underground development activities and then there is the start-up of the Deep MLZ mine, which is beginning its -- moving to its operating phase. The development activities now are focused in the underground block cave at the Grasberg mine underneath the pit, okay, and that's a major development project that we've been literally been working on for 8 years or so in developing access to it and getting that mine prepared to start up when we complete mining in the pit. We did reduce some of our capital spending when we were facing the issues with the government that emerged in January of 2017, but we've made a decision so far to keep spending on that development activities and nothing has changed during the quarter on that.

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [4]

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We cut it by about 25% earlier this year, Chris, but there's nothing changed in recent months on it. We're evaluating on a month-by-month basis.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [5]

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And moving to your second question. As we continue to develop this and as we're completing mining at the pit, as you would expect, there's ongoing efforts to try to optimize the mining at the final stages of operations at the pit. And Mark Johnson and his team are looking at ways of adjusting pit slopes, deepening pit slopes, looking at ways that we can take advantage of our existing fleet of open pit mining equipment, the shovels and truck and so forth. Some of that's been delayed by this issue of the export ban. There was a period of time of where the smelter in Indonesia was down earlier this year. So that's given us opportunities in time to see how can you optimize the final stages of mining from the pit, and that's what we're talking about there. Then you move over to the Deep MLZ mine of where we've completed the initial stages of development. In block cave mining, there is ongoing development activities that occur once you start the caving operations. But we were in the start-up of actually developing the draw points for the operations through a combination of undercut development and mining material from the draw points as they started out when we ran into this issue related to this mining and do seismic activity. And so we stepped back from that for a period of time, and we're sequentially approaching undercut development and mocking mining, which we were doing together before until we get to the point of where the caves are operating in a normal fashion. So that's a separate issue from the underground development at the Grasberg Block Cave.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. Just in terms with the discussions with the government that you're still having, are you able to rank, I guess, from maybe the government side what they say is the most important, including the smelter, the final ownership status, time lines, taxes, royalties, et cetera? What's the key sticking point there?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [7]

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Well, what we have is an effort that's designing a solution in one agreement to address all of these issues. We both have agreed that we're going to have a global solution to the issues as a package. And the keys from the government standpoint are the ones that you mentioned. They want to see divestment, their objective is to have over time, a point where we reach a 51% ownership by Indonesian interest because currently 9.36% is owned by the government. They've set a strong objective of seeing new smelter capacity developed in Indonesia. And then preserving the fiscal revenues from taxes and royalties that the government has because that's important to us. From our standpoint, our objective is having the government approve our rights to an extension that we have under our existing contract, and that goes to 2041. And that -- and to have that approval have fiscal and legal terms that have assurances and a commitment by the government to those over time so that they can't be changed by subsequent laws and regulations, and that any divestment that occurs, and we're talking at this final stages about we had originally agreed to 30%, the government wanted 51%. So that's a matter to be dealt with in the final negotiations. But whatever that comes up to, that any divestment be done so that we are paid a fair value for the divested shares. And that Freeport, there's an agreement that Freeport will continue as operator and we have to do that. We have to have the rights to operate the business as we determined it should be operated and that we also have control over the governance of the operations. And so those are the issues, and we've agreed to deal with them as a package. And that's what we are doing as we speak.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [8]

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Okay. One final one, is there any update on Kokkola in Finland. What value you could extract there versus the original thoughts?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [9]

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No, we have a lot of interest, as you can imagine, both with that and with the concern to exploration property that's near Tenke, which we had an agreement with China Moly that they would have a right to negotiate with us on it. We weren't able to reach an agreement with them. On the valuations, there's been such a change in the cobalt market, of course, since we closed our transaction on Tenke and we've had a lot of incoming interest. We're having discussions with people, but we haven't established a formal process for how to go forward.

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Operator [10]

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Your next question comes from the line of Novid Rassouli with Cowen and Company.

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Novid R. Rassouli, Cowen and Company, LLC, Research Division - VP [11]

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So Richard, when you were discussing this to the Indonesia situation down at Cesco, you'd mentioned that you guys and Indonesian government are not really starting from scratch and that the discussions are far along several years you guys has been discussing this and that you're hopeful that the 6-month extension is all that's necessary, I mean, given the background and history of the negotiations. I was just wondering, that was quite a laundry list of topics that you just listed out on what needs to be decided on. So I just wanted to see if you can give us an update on how your thinking about the situation now? Do you see an ability to have something done by October? And if anything's changed in your thinking since you kind of presented that view to us down at Cesco?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [12]

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Yes, well, I guess, the -- from our perspective, this is not a big laundry list of items. I mean, it is divestment, smelter, fiscal terms extension, and those -- it's really 4 items. There has been a significant movement within the Indonesian government of where I think coming from the senior level of the government. There's a real objective of wanting to get this resolved now that we just haven't seen in the past. And so we remain focused on getting an agreement done this year. And that is consistent with what the government's objective is as well. So there's a lot of things going on within Indonesia and its economy. There's geopolitical issues that are -- we read about everyday in the paper in Southeast Asia. There's political developments, as always, within the Indonesian government and all those things are coming to bare. We are having -- we're seeing a much greater interest by officials in the U.S. government and this administration to be supportive of businesses generally. But particularly, our situation in Indonesia, we are working -- it's our responsibility to negotiate with the government and that's what we're doing. But there's a lot of circumstances that are leading us to a point of where we're at -- the point where now of working to get an agreement. And if it can't done, now is the time we're going to do it. I mean, we're not -- we're clear this is the effort that we're going to pursue. It's not going to be any memorandums of understanding or assurance letters or any of the things we've had in the past, but we're running this to ground right now.

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Novid R. Rassouli, Cowen and Company, LLC, Research Division - VP [13]

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And the next step from that would be, I guess, arbitration?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [14]

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If we're unsuccessful, then that's the recourse that each party has to resolve a dispute. We gave notice about -- of the dispute earlier this year. There was 120-day notice period that has now run its course. So at this point, either party is free to initiate arbitration proceedings. And as you can imagine, we're doing a lot of behind-the-scenes work to prepare for that if it's something we have to do. We feel very strong about our legal position in this, but we also recognize that it's not desirable for either party to go that route. And so we are, in fact, reserving our rights. The government has rights as well. But we're working together to get this resolved, and that's -- and we're approaching it, we're both approaching it, I think, from maybe the first realtime of where there's a consistent point of view about wanting to get it resolved.

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Novid R. Rassouli, Cowen and Company, LLC, Research Division - VP [15]

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Got it. And then just one follow-up, Richard. So you guys had mentioned you're taking steps to increase the workforce or PT-FI is taking steps to increase the workforce. Curious if there's any significant lead time, just kind of train additional workers to restore normal operating rates? And if future strikes -- if potential future strikes would have an immediate impact or if the new workforce would kind of have some sort of a buffer built in?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [16]

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Well, what's going on as we're doing this is the activity in the pit is ramping down. Whereas, once, we were mining 800,000 tons a day. There were some days we've even had 1 million tons a day -- metric tons of mining in the pit. Today, our plans calls for about 100,000 tons. So there's less work being done in the pit, and that's where this absenteeism was focused. And what we're doing is rather than hiring new employees is working through contractors to hire people, often people who are experienced in coal mining and other activities for truck operations and so forth. So it is taking some time, but we're close back to meeting our plans with the activity as we speak now. And this -- all these activities really has not had a significant impact in our underground development activities. That's a separate set of workers. They have it in the -- in large part, they weren't involved in this absenteeism. While you read about a strike, there has not been a formal strike declared. There's -- the union talks has called for a strike. But in any event, it's not like the workforce went on strike. There were some workers that didn't come to work. And unfortunately after notification, some of them have lost their jobs. And that's not good for anybody, but we had to manage it that way to keep control of our operations.

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Operator [17]

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Your next question comes from the line of Michael Gambardella with JPMorgan.

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Michael F. Gambardella, JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst [18]

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You got controllable and uncontrollable issues always and you guys done a pretty good job on the controllable issues. You get a little help from the uncontrollable with copper going up, but you still got to deal with this Indonesia issue, which is, in my mind, a big uncontrollable. And I think the main -- one of the main things I hear Freeport say that they need is assurances, that the contract of work terms, which have gone out to 2041 are upheld. But how do you really get assurances of that since my understanding of the original Contract of Work was that it superseded and it changes in Indonesian government law when it was signed and that included the extensions, which were basically up to you guys in 2021 and 2031 to bring you up to 2041. So basically, what's really to stop the government from changing their mind a year or 2 from now even if they say, okay, we're going to uphold the 2041 term of the contract. How do you get assurances that they don't break the contract again?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [19]

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So repeating some of the things you said. The contract was signed in 1991. It had a 30-year primary term and it contained provisions giving us the right to two 10-year extensions of that contract. It wasn't like a renegotiating contract. And that came about because that's what Indonesian law allowed at that time. Under Indonesian law at 1991, they only had the right to issue a 30-year contract. So what you have in Indonesia and any other country is a sovereign government, which has the right to adopt whatever laws and regulations they want -- they decide they should adopt. And Indonesia passed this new mining law in 2009, which triggered the current controversy between us. The protection that we have under our contract and the protection that we are insisting be preserved going forward is that if, in fact, the government does change its mind, as you say, and takes actions through laws, regulations or whatever to take value away from what we're entitled to under our agreement, then we have the right to go to international arbitration, a legal proceeding that is structured to be fair, not something that goes through the Indonesian court system, and we would have the right to financial compensation for actions that the government has taken. We have that right, right now because the contract says very clearly. The government can't restrict exports. Well, the government has restricted exports in the past. The government is obligated to give us this extension. They haven't approved the extension yet. And what we've tried to do, Mike -- and some of these things aren't incontrollable, some of them are under our control. And what we've tried to do is find a way to preserve the values for our shareholders and be responsive to the aspirations and desires of the government and find a compromise. But as part of that compromise, we are insisting that we retain going forward the rights to international arbitration and the rights to financial claims if the government subsequently doesn't honor the contract.

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Michael F. Gambardella, JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst [20]

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Okay, understand. And is there any way for you to estimate what your results for the quarter would have looked like if none of this would have happened in terms of the contract would have never been questioned from 2009 on and you are operating under the Contract of Work? How different will your results be today?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [21]

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Well, let's see. We would have completed mining the open pit last year in 2016. If you go back and review what our plans were, then we would have had an extraordinary year in 2015 and 2016, over 3 million ounces of gold and large copper things. But for 2017, we would have completed mining the pit and we would be ramping up the DOZ. So remember, we -- the Deep MLZ. So remember we used to talk about that falloff, the wedge, and we were talking about how to offset that through stockpiles and things. So we would have had extraordinary years in 2015 and 2016. You can -- [you'd] like to assume we didn't do the oil and gas deal, that would have made a difference. We wouldn't have been selling assets and doing all the -- and selling stock and doing all the things had to do to pay that debt off. So I'll answer your question, but I don't allow myself to go back and say, we've got a shit of deal. We're in the here and now. We have control over a lot of things, including some issues with the government, and we're working hard to deal with those issues.

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Michael F. Gambardella, JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst [22]

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The would, could, should have, if you don't get a deal with the government and you do go to arbitration, I would assume some of the would, could, should have would go into your estimate of what you've lost in terms of value.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [23]

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No question. No question. I mean, we would -- and so this arbitration claim -- again, I want to emphasize because I know my friends in Indonesia are listening to this and I'm speaking clearly. You know that we don't want to do that. We want to find a mutually agreeable solution. But if we don't, the claims are going to be very large.

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Michael F. Gambardella, JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst [24]

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Sure, yes, I would imagine.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [25]

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That was a big asset.

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Michael F. Gambardella, JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst [26]

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Yes, huge asset, huge difference in performance under the Contract of Work and what's happened. And how would that transpire assuming you don't get an agreement, you go to arbitration, you win the arbitration? What happens next in terms of -- how do you receive proceeds or value consideration?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [27]

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Well, it gets to be an obligation of the government of Indonesia. I mean, that's an obligation under their law and then there's steps you can take internationally to enforce that as well. There's been some precedent for that, if we're other countries. Indonesia had a case several years ago as well, and so there's processes to follow. Indonesia, as a member of the G20 as a company, country's that's done big picture well economically, they're going to have pressures of wanting to get this resolved in a way that helps them with their bigger picture, economic goals, international goals and so forth. So it's not only Freeport in representing our shareholders that has objectives of resolving this, there are also going to be pressures facing Indonesia and getting it resolved. And I think that's becoming more apparent to them.

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Operator [28]

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

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Christopher Domenic Mancini, G. Research, LLC - Analyst [29]

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I just so -- I was just wondering, in terms of your projects, and the potential project that the expansion projects that you showed in your presentation. If copper were at say $3 a pound, say it would go to $3 to $3.10 or something-like-that a pound, and it was there for a couple of months, do you feel like you currently have the balance sheet to start any of those projects? Or would you like your balance sheet to be in a better position in terms of your net debt position to start a -- I don't -- I guess you guys haven't mentioned how big these projects would be, but say, $1 billion expansion project?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [30]

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All right. So Chris, the short answer to your question is yes, the balance sheet's okay. We could do those. But these projects aren't $1 billion projects. I mean, you know the Cerro Verde project, which was a major expansion, was $4.5 billion, $5 billion project, and it was as well situated a project to do this on that you're ever going to find anywhere in the world. But the El Abra project is a project that would be bigger than that, okay? The -- we could get to start going on the Lone Star, Safford project in that range, okay.

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [31]

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Yes. That's less than a $1 billion, but it's been over multiple years.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [32]

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And yet, to develop the sulfide deposit there is another multiple. So these are major-type projects. And while I think we are on a path towards starting the Lone Star deal, it's not in our numbers now, but I think it'll be fairly shortly. But to do one of these multibillion-dollar projects like we would be looking at, at Bagdad and the expansion at Sierrita and the sulfide at -- in Safford and so forth, you're going to need to get copper not just for a month or two, you're going to have a clear view that the world economy is developing, that there's the uncertainties that currently overhang, the economy in significant ways are clearer to go forward. And that's not just for us, but that's for the rest of the industry. So I think, before that happens, you're going to see a period of time where there's going to be a shortage of copper, and you're not going to see the price just go to $3. We just need to look over our shoulders and we can see at times we had copper at $4, and we're heading for a world of where that is -- that's I believe is in the cards, and it could even be more than that, because the great thing about copper is that when you look at its uses, it's not the component that drives demand. Copper is an important, a necessary component of those. But -- so you know, anyway, you've all heard me get on my copper sulfides. That's so boxy, at one point, I was kind of a lone prop in the wilderness. Now, there's a choir singing this song, and so -- and yet you don't see people jumping up to invest in new projects, and new projects are very scarce. There is some projects that are being completed and so forth, but the wall of copper that was supposed to come about in 2016 didn't show up. And now to justify the coming wall of copper that some people are talking about, you can develop these new mines at $2.50 or less and this can't be done. It just can't be done. And when that -- Kathleen is telling me to stop, so I'll get off.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [33]

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That sounded good though. The choir singing, sounded good. But the -- so right. So what you're saying in that, Richard, is that you can essentially, at the current -- your current balance sheet, current copper price, you'll probably be able to approve the Lone Star oxides, which will essentially replace some of the assets that have being depleted in Safford, from what I understand. But these bigger projects like El Abra, you think that you do have the balance sheet to complete those, but that you wouldn't embark on those unless you saw runway for copper being above $3 a pound and going higher. Is that kind of pretty accurate?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [34]

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That is exactly accurate. And I'll just mention one other factor. With everything that we've had going on over the years, we've developed some incredible, strong relationships in Asia. I mean, in China, Japan, Korea, I mean -- and we have -- I can't tell you the number of people who want to be our partners going forward. I mean, Freeport's earned a lot of respect. By the way, we're the operators of all of our projects and we've done, kind of, every kind of project that can be done, and the people in Asia are hungry for copper and they want to be our partners. So financing is going to be one of -- evaluating the alternatives as opposed to scrambling to find it.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [35]

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Okay, great. And do you have a sense as to

(technical difficulty)

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [36]

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(technical difficulty)

And while the government says, we have certain requirements to get a deal done, and that in relation to smelter and divestment, the financial issues, we said we have requirements to get a deal done. You know, I'm real clear with the government that our shareholders will not accept us not getting fair value for any divestment. I mean, I hear that over and over again because they see our rights under arbitration, we know our legal case is strong. So it's a recognition. That we recognize what their requirements are, they're recognizing what our requirements are.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [37]

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And are you seeing -- your comments suggest that you're actually seeing movement then, in terms of sort of the bid ask right here in terms of negotiations. Is that fair?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [38]

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Yes, that's fair.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [39]

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Okay. And -- I mean, your comments about working towards a resolution by the end of the year. That's passed the -- I think the October temporary export permit. Would your expectation be that, that would just be renewed to kind of keep negotiations going in October?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [40]

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My expectation is that we'll get it done within the 6-month period.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [41]

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I see, but it might go beyond the current expiry of the -- or are you saying you think you might it get it done by October?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [42]

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Yes. That's what I expect. Now look, you know, there are enough people in this call that have heard my expectations be unfulfilled in the past, so yes, realistically. But there are a lot of things -- Indonesia's got a 2019 election coming up, et cetera, et cetera, and also all those things point to getting a resolution this year.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [43]

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Okay. And then just finally, you mentioned with respect to Grasberg production that you're looking at accessing a portion of the Grasberg Block Cave through the open pit. Can you give us a sense of how much additional products -- copper production that could give you in '18, '19?

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [44]

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We'll know more as we mine through some sections, and Mark Johnson is on the line, he can add to this, but we'll know more as we conduct mining to see if we can, in fact access or that would have been mined underground over time. And the benefit of taking it from the open pit is you can get it now as opposed to getting it over several years in the future. But it's only order, and we'll know more as we get into it. But it's on the order of couple of hundred million pounds of copper and 500,000 ounces of gold. Mark, I don't know if you want to add anything further to that?

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Mark J. Johnson, Freeport-McMoRan Inc. - President of Indonesia and COO of Indonesia [45]

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No, I just -- the one thing I would add is that we've had a very successful campaign on our perimeter blasting. We do a lot of pre-splitting for our final walls. And over time, our geotechs, our engineers are gaining confidence that we can continue to leverage on that experience and we're putting additional resources out there to ensure that the quality of those blasts are such that would -- we maximize this opportunity. All that we're looking at there to is, we don't have any expectation that it would cause any other concerns on the high wall. This is upside that would be purely generated on actual results in the field. We're not going to compromise the overall pit's stability or any of the operating safety features or standards that we have. So this will be something. As Kathleen mentioned, we'll know more month by month. We've changed some of our blasting practices now. Now we're mining into the area that we blasted. As we have opportunity to observe the results, we'll be able to add more clarity as to what the upside might be.

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Christopher Domenic Mancini, G. Research, LLC - Analyst [46]

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Okay. And what would be the expected timeline then to update, say the mine plan moving forward?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [47]

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We'll do it every quarter. We don't have an annual waiting process here. We update our plans every quarter, and so we'll talk to you in 3 months about where we stand with.

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Operator [48]

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Your next question comes from the line of Alex Hacking with Citi.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [49]

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I have two questions. The first question, at the Deep MLZ, the geotechnical issues there. You mentioned the impact on production profile. Would you expect any impact on future OpEx and CapEx there? And then second question is also at Grasberg. I think you've been very clear that Freeport needs to keep both operating and governance control. Do you believe -- is there a structure that you could put in place where you could divest 51% but still be comfortable that you have that governance and operating control? Or are those 2 things mutually incompatible i.e. your maximum divestment could -- should be less than 50%?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [50]

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Okay, so...

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [51]

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Take the last one, and then we'll come back to the first one.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [52]

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All right. So with respect to the last one. We are suggesting to the government that the optimal way for us to proceed with divestment would be to start with a listing on the Indonesian Stock Exchange. And that listing would probably be on the order of a 10% interest. The Indonesian Stock Exchange has gotten to be a fair market, international investors participating in it and so forth. There's lots of discussion within the government about how to proceed with this divestiture deal. But there are ways legally that we advised and they're working with the government on -- as to how to achieve this objective of maintaining control over governance. And it basically comes down to being able to elect the majority of the Board of Commissioners. That happens internationally with a number of companies in different environments. So it's not something unique to Indonesia. Now the second question has to do with the OpEx and CapEx. It is more of a question of timing. We're going to do some things sequentially that we were doing concurrently initially in terms of developing undercuts and mucking ore. So it doesn't fundamentally change the cost structure at all, but there is the timing impact, and so that has some consequence to it. What we believe will happen is that, as we get the mine in position and caving starts in a normal fashion, then we'll go back to the same plan we've had all along.

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [53]

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And we've been following protocol with respect to ground support, et cetera, and this mine is requiring investment in significant ground support, more than what we've had in the DOZ, for instance. But the good news is that all of that is -- with this significant event we had in June, all of that held up very well.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [54]

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Yes. And there were no injuries, and I want to be clear there, no people were hurt. There was some damage to the mine infrastructure, but no major loss of equipment or things like that. And so there's no real change in the fundamental plan that we were on. It's more of a delay.

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Operator [55]

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Your next question comes from the line of Lucas Pipes with FBR & Company.

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Lucas Nathaniel Pipes, FBR Capital Markets & Co., Research Division - Analyst [56]

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Richard, you just mentioned how you would approach the question of obtaining fair value for 10% stake of PT-FI. What do you think is the bid-ask spread on that specific point? So how would the Government of Indonesia address that question?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [57]

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So we have really not engaged in any negotiations on fair value. In early 2016, we voluntarily submitted a valuation of PT-FI at that time to the government. But there has been no formal response to that. You see some comments in the press that we see, but we really haven't gotten to the point of having a bid-ask.

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Lucas Nathaniel Pipes, FBR Capital Markets & Co., Research Division - Analyst [58]

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When do you think this will come up in the negotiations?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [59]

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It's -- as we complete the negotiations, that's -- the process for divestment, the standards of divestment will be part of the ultimate agreement on the package that we have. We won't -- it won't be an issue of agreeing on evaluation, but the process of how do you get to a fair value -- valuation. And recently, I noted that the government put out a positive comment about having natural resource companies operating in Indonesia be listed on the Indonesian Exchange, and again, that's -- that in our view is the fairest way of seeing what the value of this business is. Let us get an agreement that settles things down, take an appropriate time, go out, have a fully-marketed interest. I know from talking with investors, there would be investor interest in investing in this asset, and that way you have a market-based determination of fair market value.

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Lucas Nathaniel Pipes, FBR Capital Markets & Co., Research Division - Analyst [60]

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That's helpful. Then a quick question on the CapEx side, and you mentioned that you expect to spend about $700 million on the underground development and that it depends on the resolution of the PT-FI long-term rights. So if the status quo persists, hypothetically, through the end of the year, would you still expect to spend $700 million? Or does it depend on a -- does the $700 million depend on the resolution at a given time before the end of the year?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [61]

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So the $700 million is our current spend rate. So I think you can anticipate that as we go through this year and engage in our discussions, unless they just were to fall apart, which I don't expect, that you can anticipate that we'd be spending that $700 million -- now we got $750 million booked for next year, and that's dependent on getting the agreement.

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Operator [62]

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

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [63]

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Weather.com says the next 15-day temps in Safford vicinity averaged 96 highs and 74 lows, which, I guess, is a big cool wave. How did you manage to produce copper when it was 123 highs and 95 lows? Did the power grid fail on any days? How do you manage equipment utilization and human safety? And second, a separate question. When will you define a mineral resource for the Lone Star sulfides where there's only oxide found so far? And, I guess, engineering the project requires having a resource.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [64]

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Yes. So John, operating in the heat in Arizona is kind of like operating in the rain in Indonesia. I mean, that's been part of the business all along. And actually, I'm right in saying, it's hotter in Phoenix than it is typically in Safford and Morenci because of the altitude. And actually, when we have operational issues, it's generally when we have unexpected rainfall, because a little bit of rain can cause that. Red, do you got any?

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Harry Milton Conger, Freeport-McMoRan Inc. - President & COO of Americas [65]

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Just one thing to add, John, we do work with our people diligently on hydration and avoiding heat strokes, knowing the signs of overexposure, providing lots of Gatorade and water and those kinds of things -- air conditioning and equipment.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [66]

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So the regional utility didn't have any failures when it was 123 in Phoenix?

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Harry Milton Conger, Freeport-McMoRan Inc. - President & COO of Americas [67]

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No. No we did not.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [68]

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You don't lose power? They don't call you up and ask you to turn off the electricity at your mines so that they can air-conditioned people's houses?

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Harry Milton Conger, Freeport-McMoRan Inc. - President & COO of Americas [69]

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No, didn't happen there. And to Richard's point, when we have the monsoon rainstorms, that's -- we have exposure to losing power then. And then just one quick comment on the sulfides there. We've got an active drilling campaign underway now to further define sulfides in that district.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [70]

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When we have a resource at the Safford -- at the Lone Star sulfides?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [71]

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We have a resource defined. We did -- it's an interesting to debate to watch Red and his team debate with Kathleen about when are we going to give them enough money to drill that resource to the point of having reserves. But we feel confident. I mean the resource is so large that there's an opportunity for a development there. It is not resource-dependent.

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [72]

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John, it's on Page 6 of the slides. You can see it's the biggest -- next to Cerro Verde, the biggest resource, in the 266 billion pounds of copper.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [73]

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Right.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [74]

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It's the possible -- it's like... it's the not yet...

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [75]

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Yes, potential.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [76]

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Right, right, right. So the Dos Pobres and San Juan are the sulfide resources that are in your Annual Report and not the Lone Star?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [77]

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Yes, that's correct.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [78]

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So you got to give Red the money to do what he's got to do.

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Harry Milton Conger, Freeport-McMoRan Inc. - President & COO of Americas [79]

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Yes, we haven't had any reserves yet for Lone Star.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [80]

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All right, so you're on that side of debate.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [81]

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We just want you to talk with facts, not geologic interferences a little bit like our -- we all have dreams.

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [82]

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Right, right. No fake facts here.

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Operator [83]

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Our next question comes from the line of Fawzi Hanano with Berenberg.

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Fawzi Hanano, Berenberg, Research Division - Analyst [84]

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Just a quick question, and not about the regulatory on Indonesia but more on the operation side. In terms of milling grades, I've read some articles quoting, whether it be correctly or wrongly, that you got to targeting 200,000 tons per day run rate? So we had about 140,000 from the open pit, 60,000 from the DOZ. I would like to know what you guys are really are targeting, particularly at the open pit before it starts the ramp down process?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [85]

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That's roughly what our plan calls for, what you just mentioned.

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Fawzi Hanano, Berenberg, Research Division - Analyst [86]

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And would it be towards end of Q3, later this year? In terms of planning, what are you guys planning?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [87]

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Well, we've had some recent days of where we've been at 200,000 tons a day, and the reasons that we weren't earlier had to do with this worker absenteeism, because that was focused on the Grasberg open pit operations and we weren't meeting our targets for extracting ore from the open pit. But the mill is all aligned and the mill's capacity is on the order of right mark, 250,000, 260,000 tons per day. There are 3 separate mill lines, and then we are preparing that mill to operate at those higher levels as we achieve our Grasberg Block Cave underground or in the deep MLZ in the future.

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Fawzi Hanano, Berenberg, Research Division - Analyst [88]

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Okay, Richard. And a quick question on CapEx. Looking at the other mining CapEx to increase about $300 million to $1 billion in 2018. Could you give a little bit more color around where that's being allocated? And is this a result of under spending and sustaining CapEx in the last couple of years?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [89]

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Yes, that's the point I was going to make. We have been, particularly as we went into the 2016, but even before that as the -- when the copper price dropped, and as we were facing the financial situation that we faced with the oil and gas investments and the big capital commitments that have been made there, that we've now got them behind us, we were real tough on spending on maintenance capital and projects. Our guys did a great job of sharing equipment, cannibalizing equipment, and so forth, and now we're at a point of having to go back and do some things that had been deferred in the past. So that is -- that's all that is. It's just -- we meet every quarter, the guys. And Red is doing it every day with his team, looking at what needs to be done to maintain safe production. And so there's some catch-up type things that we need to spend money on.

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Fawzi Hanano, Berenberg, Research Division - Analyst [90]

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Right. As per their data...

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Kathleen L. Quirk, Freeport-McMoRan Inc. - CFO, EVP and Treasurer [91]

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And to the extent that we can defer and maintain efficiencies, we continue to look at opportunities to do that. But as you see here in 2017, we're spending very little on sustaining capital in the Americas. And we've got some things, as Richard said, that were planning to do for '18 but the teams all focused on, if there's things that we can do to push things out, we'll do it. But we want to maintain the integrity of our equipment.

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Mark J. Johnson, Freeport-McMoRan Inc. - President of Indonesia and COO of Indonesia [92]

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Now Richard -- this is Mark. I just wanted to add, with the ore qualities that we have right now, you're right, that we have ran at least -- we've ran over 300,000 through our mill. And with the type of rock that we'll be running for the reminder of the year, we'll be averaging nearly 200,000. There'll be days obviously, it'll be 220,000, 230,000. Other days, with maintenance, it'll be less than that, but fourth quarter will be in the 195,000 range.

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Operator [93]

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Our final question will come from the line of Michael Dudas with Vertical Research.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [94]

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I'll make it quick. You guys have been very patient. Just compared to March, which you'd talked about, you're seeing more typical disruptions in copper supply and mining versus less-than-typical in the past few years. Is there a chance we see more than just typical as we move forward, given all the lack of investment and given the depletion issues that we're seeing in the industry?

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Richard C. Adkerson, Freeport-McMoRan Inc. - Vice Chairman, CEO and President [95]

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Yes, Michael, that's a good point. There is a correlation between labor issues and copper price. I mean, as the copper price rises, workers are, globally, will be expected to ask for more, and you can see what the labor situation can do to the global copper supply with what Escondida went through recently. Contractors will be an issue. Labor issues are particularly sensitive. And Latin America, and Chile and Peru, which are the 2 largest copper producing countries, I guess China is in that mix somewhere, but you know I always say, labor strikes are a contagious disease. So that's -- that can be -- that can happen. Then, as equipment ages and as copper prices rise, people press to get more out of it and that puts pressure on mechanical issues, which many of these mines were developed years ago. You know at Grasberg, our biggest SAG mill was put in the mid-1990s. So as equipment ages, you get stresses mechanically on issues. Then governments start seeing companies making more money and around the world start seeing other ways of getting more out of it. We went through an issue in the Congo, as some of you may remember, where we had to deal with that. But all those things add up. That as copper prices rise, the -- it's sort of a self-fulfilling prophecy that the opportunities for disruptions grow and that, coupled with whatever other dynamics there are, the rising copper prices tend to supercharge that kind of movement.

Well everyone, thanks for participating. We will be transparent as we go forward, and if you have any follow-up questions, check in with David Joint, and we will be responsive to it, and look forward to talking about our progress next quarter. Thank you.

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Operator [96]

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