Freeport-McMoRan Copper and Gold, Inc. (FCX) Q3 2013 Earnings Call October 22, 2013 10:00 AM ET
Kathleen Quirk – CFO, EVP and Treasurer
James Moffett – Chairman
Richard Adkerson –Vice Chairman, President and CEO
Jim Flores – Vice Chairman, President and CEO of Freeport-McMorRan Oil & Gas Subsidiary
Sal Tharani – Goldman Sachs
David Gagliano – Barclays Capital
Michael Gambardella – JPMorgan
Brian Yu – Citigroup
Curt Woodworth – Nomura
John Tumazos – John Tumazos Very Independent Research
Oscar Cabrera – Bank of America/Merrill Lynch
Mitesh Thakkar – FBR
Joseph Allman – JPMorgan
Paretosh Misra – Morgan Stanley
Brian MacArthur – UBS
Ralph Profiti – Credit Suisse
Carly Mattson – Goldman Sachs
Harry Mateer – Barclays Capital
Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold Third 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.
Thank you and good morning. Welcome to our Third Quarter 2013 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, anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call.
In addition to analysts and investors, the financial press has 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: Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, Vice Chairman, President and Chief Executive Officer; Jim Flores, Vice Chairman, President and Chief Executive Officer of Freeport-McMoRan Oil & Gas; and we also have a number of senior executives in the room today with us.
I'll briefly summarize the financial results, and then turn the call over to Richard, who will be referring to our slide materials located on our website. As usual, after our remarks, we'll open up the call for questions.
Today FXC reported net income attributable to common stock of $821 million or $0.79 per share for the third quarter of 2013 which compared with $824 million or $0.86 per share for the third quarter of 2012. The third quarter of 2013 results included net charges for unrealized mark-to-market loses on oil and gas derivative contracts totaling $98 million to net income or $0.09 a share.
As you’ll see, in the third quarter our results benefited from a return to normal operations at Grasberg and we had a significant contribution from a full quarter of results from the recently acquired oil and gas business. Our consolidated third quarter copper sales totaling over 1 billion pounds were 13% above the year ago period. We had higher production throughout our global mining business. And our gold sales were 50% above last year’s third quarter because of anticipated higher ore grades in Indonesia. Our third quarter sales of oil and gas totaled 16.5 million barrels of oil equivalent. That was about 10% higher than our July 2013 estimate of 15 million barrels of oil equivalents. That primarily reflected, as Jim will be talking about, strong performance in the Eagle Ford and the deepwater Gulf of Mexico fields.
Our third quarter 2013 average recorded copper prices of $3.28 per pound were below last year’s Q3 of $3.64 and gold prices of $1329 were approximately just over 20% below the year ago quarter. Oil prices were strong in the quarter with rent pricing averaging almost $110 per barrel and the realization by oil and gas division oil realization was $106 per barrel before hedging impacts.
Generally strong operating cash flows of $1.9 billion in the quarter, that was net of about $300 million in working capital uses and our operating cash flows exceeded capital expenditures of $1.6 billion during the quarter. We ended the quarter with total debt of $21.1 billion, which was similar to our June 30 balances. Our consolidated cash balance totaled $2.2 billion at the end of September and that was reflecting a $1 billion dollar supplemental dividend which was paid during Q3.
I would now like to turn the call over to Richard who will be going through the slide materials.
Good morning everyone. You have heard us talk about all throughout 2013 about the word execution and that’s been the theme for our management team as we’ve combined our new oil and gas business with our existing mining business and what’s so good about this quarter as you saw the first full quarter of oil and gas operations. We had strong execution across all of our business. And that's really what we're going to be focused on going forward.
Kathleen talked about the strong margins and cash flow for the quarter. And that reflected solid operating performance from our global mining business and particularly important was the improvement at Grasberg and its operations as it is now returning to more normal grade access because of our mining sequencing and improved operating performance at that important asset. Really happy to report that today in Indonesia, our last night, we signed our CLA agreement for the next two years.
The good news with that is that we avoided any kind of work stoppage, the strike two years ago was a major negative for all the stakeholders involved there, and with this new CLA agreement, we are going forward on a more positive basis with our workforce in general and with the union. Both sides are -- while neither side got everything it wanted, both sides are very happy with the results, and it’s an important step for our company.
The quarter reflects a significant contribution from our oil and gas business and that's very exciting. Jim is going to be talking about the details of that in a few minutes. Our expansion projects and our mining business progressed. The Morenci expansion is on track for completion in the first half of next year. At Cerro Verde, we have completed 70% of the engineering; construction is in progress. I visited the operations a couple of weeks ago and it was good to see the groundworks making great progress and we are starting physical construction, ordering equipment and going forward with that project.
In the oil and gas area, the Lucius development is progressing so that we would have first production next year, and that's a very exciting project and really a precursor for other things that we can be doing from an exploration standpoint, the Deepwater Gulf of Mexico.
We are continuing to emphasize throughout our operations the need for cost and capital discipline, and that is a theme for all of our efforts in these marketplaces and the cash position, debt position that Kathleen talked about reflects the fact that we paid $1 per share supplemental dividend 1st of July.
And looking at the financial highlights, which for your information, are included on Page 4 and that Kathleen talked about it, reflects the strong volumes, the improvement in our unit cost situation from a mining standpoint. Net unit cost was now -- for the quarter was below $1.50 a pound . So we have high margins there, down from $1.85 in the second quarter. And then we have strong volumes, very strong margins in our oil and gas business, 90% of that revenue is driven by oil products. And that gives us the kind of strong margins that we have.
From copper market standpoint, I was at APAC and Bali and then LME week and there was a lot of talk about Asia, economic activity and the levels of demand. China remains, of course, the important global user of copper and the source of copper growth globally. The demand in China during this year has been stronger than many people expected. The Chinese are confident about their economy going forward, and all our indications from our business there is optimistic. What we're also seeing is improvement in the U.S. demand in sectors that are important to copper usage.
Construction, both residential and commercial, automobile activity is very positive and despite all of the political uncertainties associated with economy, our business and our customers’ business in the U.S. in the current conditions is progressing well. And we're seeing some initial signs of improvement in Europe through some demand activities. Globally premiums for our downstream copper usage are strong. Consumer inventories remain low and the demand side is positive. Many people are pointing to copper supply issues, and as Grasberg and Escondida have returned to more normal levels of operations, that's providing more copper, there are some development projects that are going to be coming on stream in the next two years.
But the projected surpluses that people are pointing to are small in relation to the overall marketplace and lots of things can happen that would change that outlook, as it has over the past 10 years when we've seen copper supply continually underperforming expectations. And longer run, the delay in projects, companies cutting back capital points to a supportive supply situation for copper in the long run. And we remain very optimistic about that.
The Slide 6 shows our unit costs by region and our sales by region. During the third quarter, we saw improvements in every region where we operate, most notably at Grasberg, as it has returned to high grades and more normal operations. And as we look forward, the higher volumes at Grasberg as we complete mining from the open-pit over the next few years will be very supportive of our overall cost structure.
Volumes performed well, particularly in North America Red Congress here, as I mentioned Grasberg. We had a very strong quarter in Africa, even though at the very end of the quarter we and other miners there were affected by power deliveries. That's something we're working with the government on to rectify but our team there is doing a great job in running the business and managing the mining and logistics operations there. We were short of our expectations even though volumes are up in South America, because of ore characteristics both at Candelaria and El Abra. These are kind of short term issues that we manage our way through. It was a good quarter with our volumes up, just weren't up as much as we had initially expected. And we are working to deal with that as we go forward into 2014.
The oil and gas business has its regional operation results summarized on Page 7. You can see very strong margins. California, historically, a high cost place to operate, with the kinds of levels of global oil pricings and the nature of our revenue realizations there. It is a high margin business and then you look at the Eagle Ford, the onshore South Texas shale play and the Deepwater in the Gulf of Mexico, you can see just how attractive operations are in that business.
And then from operating results, California was on expectations, Eagle Ford which with its gas liquids production averaged 46 million a day. The operations there went very well and the deepwater outperformed. We benefited from the fact we didn't have -- we had a quiet storm season through the end of September and no interruptions there. But overall it’s really gratifying to see just how well our new business activities operated there.
Grasberg, you can see on Page 8, the details of my comments about returning to more normal levels of operations where our mill rates was 200,000 tons a day. Copper grades were essentially at our reserve grade levels, and our unit cost levels were down from that. We expect a strong volume situation going into the fourth quarter. We're going to have some unusual sales activity in that quarter. We're expecting we'll have a fairly large intercompany sales deferral because Atlantic Copper had been engaged in a turnaround that occurs every eight years. That's been completed but it will result in some deferrals of inter-company sales during the fourth quarter that we think will have an impact of about $0.05 a share. But operationally, we are anticipating a good quarter and we are certainly off to a great start this year -- I mean, this quarter in October.
Our projects, which I mentioned at the outset, are going well. The Tenke project is essentially complete other than adding a new asset plant there that was project was own time and within budget and it's a very difficult place to achieve that kind of performance and Cerro Verde is progressing as is Morenci.
Our exploration activity continues. It reflects what we've been doing over a long period of time. We are analyzing results from the extensive amount of core drilling that we've done over the past six years. Our actual budget for next year is down and that just reflects the nature of where we are in the process -- lack of emphasis owned exploration. The real underlying strength of this company has to do with our prudent and probable copper reserves, which $2 mine plans are over 100 million pounds and then resources beyond that which have already been identified beyond those proved reserves is another 100 million pounds and that gives us the ability to have very a long life continuing production and the opportunity to develop new growth projects to run the beyond the ones that we're working on currently.
Jim, why don't you take over and let you talk about our oil and gas business.
Right. Richard, thank you. Good morning everyone. Looking on Page 11, looking at the oil price curve. It's always a great place to discuss the oil business, especially when it's a strong curve. Like what we've seen in the market we feel is pretty stable. You've got a lot of political unrest, you've got a lot of market swings in WTI that we are not experiencing because of our location of our reserves being on the coastal areas of the United States and the Gulf of Mexico where we are pricing at our California spot or LLS off [ph] the Brent pricing. And as you hear more and more about the increases of production coming out of Bakken, the Permian and so forth, they're really going to have widening differentials in the Mid-Con for the United States. And our projects won't be -- have to suffer those differential widenings and therefore we will be able to maintain the margins that Richard and Kathleen alluded to in their talks and so forth, because we believe oil and gas business is a high margin business reflective in the numbers that came out here in the third quarter.
We expect to protect that. One of the interesting things when you grow production 10% above your plan, your cost go down because we have a large fixed cost of component to our oil and gas business on the operating side, just like on the mining side. And as production goes up you divide those costs by fixed number and that's why you see our costs going down from $19 BOE to $1680 for the quarter, which is a real big improvements points to the statements Richard made about execution. Execution, execution, execution is where the oil and gas business is really turned on.
We have obviously had stronger oil prices to help that margin out as well and the disciplined capital spending and so forth, we obviously stayed within budget. We were able to execute in spite of the awesome task of putting two companies together with a third one in our three-way merger that closed in June 3. So I can't tell -- say enough about the guys and gals in the oil and gas group build a rally, have an outstanding quarter in spite of all the disruptions of who report to who and who's email worked and who's email didn't. So great job all around there.
Looking to Page 12, the operating assets are very consistent as far as we talked about in the transaction and also as far as going forward. You can see where our oil business in California, Eagle Ford and Gulf of Mexico is the focus of our company with almost 98% of our assets. Obviously the gas business is large but with prices impaired where they are like we had forecast, it's a small piece of our business until that market has price recovery sometime in the future. We got the details here with the lot of strong attributes. I'm not going to go through to save everybody some time but the third quarter 2013 operating cash margin of 1.1 billion is a great place to start for this important growth business for the company.
Flipping to page 13. The Lucius Deepwater project is one of our significant projects coming on next year. Besides the initial drilling starting in the fourth quarter at our Holstein field in the Gulf of Mexico. This is going to be a very large production add. Our operator Anadarko is working to make sure we have this production timely in the second half of 2014 and all indications that we're going to be able to accomplish that. So looking forward to our 23.33% interest at 80,000 barrels a day and the gas production related to it.
On Page 14, you can see more of a pictorial depiction of our deepwater Gulf of Mexico business. You can see our production facilities in red. Those are our large facilities that have a quarter of a million barrels of production capacity running at about 25% right now or 65,000 barrels a day. Remember, our intent here is to take our -- that infrastructure and fill it, and fill it by drilling new wells on adjoining prospects, adjoining leases and our existing field by redeveloping it. That's what our business plan is all about and those are the projects in blue that we plan on subsea tie-back into our infrastructure.
Great rate of return projects, 50% to 60% rate of return projects. This is the cornerstone of our CapEx budget in the oil and gas business. On top of that we have our Lucius project in green, our Phobos discovery that we will be looking at developing for the later part of this decade. Those are both Anadarko operated and there’s a little star over in the left called Terra as an exploratory project that's very high potential like Lucius that we're going to be drilling mid-year with one of the drill ships show up about the second quarter. So stay tuned for some exciting results from that.
Speak of exploration on Page 15, our ultra-deep activities. We continue to lead the industry here with several great partners like Energy XXI, Moncrief and Chevron. We are in the process of moving in the completion mode. The production test of Davy Jones 2, Lineham Creek and Blackbeard West in 2014. We're drilling a very significant exploratory well in Lineham north and we're looking forward to getting those results hopefully by year end.
At same point in time we've got one to two wells planned next year to really capture the exploration phase of this project. And then we'll have to evaluate how we want to develop it and at what timeframe basins to be more responsive to what the gas price is doing. And we've got plenty of time, we've got the resources obviously to do it.
Richard, that's brief but it is of my kind of taste [ph] and I will turn it back over to you.
Thanks Jim. All right. Putting this all together and seeing what our outlook is for 2013, our sales outlook continues to after adjustments around the 4.1 billion pounds of copper. Our goal is 1.1 million ounces for 2013. Again, this is essentially rounding for adjustments of 92 million pounds of molybdenum and 37.5 million barrels equivalents for oil, that's up a bit from our previous guidance.
Kathleen reminds me, which I think Kathleen, we are always doing when I was talking about Eagle Ford, I said millions rather than thousands. So make sure that we are talking about thousands of equivalent barrels there at Eagle Ford earlier. Our unit cost continues to be the same. We are working to try to constrain costs, increase volumes and our unit cost for oil is down a bit with our positive operation results. At 3.25 copper, that would give us operating cash flows in the range of $6 billion and that's after a $300 million working capital use. That number always moves around till we get to the end of the quarter and each $0.10 change in copper for the remainder of 2013 is a $90 million variance in operating cash flows.
Capital expenditures continue to be estimated at $5.5 billion. Then as we look forward to production volumes over the next two years beyond 2013, you can see increasing volumes for copper and the 2015 reflects the target that we've had with our three expansion projects and the restoration of Grasberg more normal levels to get up in the 5 billion pound a year range. Gold volumes reflect again the positive situation at Grasberg and the growth in oil production reflects solutions and other improvements in activities there in the offshore.
And then if we go beyond 2015 we see really significant growth continuing. Unit production cost situation on Page 18 we have shown the details of where that is. It’s essentially really in line with where we gave guidance in the second. And then our sales by region are outlined at the bottom of the page. Again the volumes are consistent with previous guidance, we have worked to beat it.
Our EBITDA and cash flow models are shown on Page 19, showing variant copper prices from $3 to $4 and then with for '14 and '15 averages EBITDA ranges from $10 billion to $15 billion and operating cash flows from $8 billion to $11 billion. Then the increases that comes into play in 2016 which is very significant, shows 45% increases there as we get our projects on stream and get those additional volumes in place. And you can see how that varies with copper prices going with EBITDA $15 billion to $21 billion in operating cash flows, net of taxes and cash interest of $12 billion to $16 billion.
The sensitivities that we present for your use are shown on Page 20. Big sensitivity, of course, is copper prices where $0.10 means $325 million of operating cash flows on an annual basis. Our capital expenditures are shown on Page 21, showing roughly $4 billion a year for '13, '14, '15 and oil and gas CapEx 2.7, 2.9 for the next two years, again in line with our funding from its cash flows.
After 2015 mining projects will drop off with the completion of Cerro Verde to our CapEx will drop off, our volumes will increase and we'll get the benefit of our expansion projects. We remain committed as our Board has instructed us to maintaining a strong balance sheet. We have a good track record of doing that. We have set a target of reducing our debt to a $12 billion level and that's approximation over the next three years. That includes continuing our common stock dividend , it's current $1.25 per share annual rate with our large resource base, our strong cash flows and capital discipline, we can do this.
Our board has challenges, find ways of advancing our debt reduction target and we have a great set of assets that allows us to consider a range of alternatives for doing that. That could include things like asset sales, joint venture arrangements, special purchase financing. We are looking at the opportunity for master limited partnership involving additionally some of our oil and gas assets. All those are alternatives that we are working diligently on to see how to advance our debt reduction target. We are in a position where we are not -- we don't have to do anything and anything we'll do will be to achieve – and achieving that target will be done in a way to enhance shareholder value and so that is something that we are working on.
End of the day, we have a strong, focused organization on execution, focused on returning -- on generating shareholder returns, managing our base operations to achieve our production costs, manage our costs and do that in a way that provides a safe working environment for our employees and positive results for all stakeholders and communities where we operate.
We are looking over the long-run to find ways to invest and grow our business because we have the resources to do it. We’ll do that in a disciplined way that recognizes the market realities, the best uses of cash, the ones that give us our strong returns and where we can execute in a positive way. We’ll protect our balance sheet and our dividends. And I’m very pleased with this first quarter start to achieving all those goals.
Jim Bob, we are ready to take questions. If you have comments you would like to make now or we’ll go straight to the question-and-answer session.
Let’s just go right to the question.
Okay. Well, operator. If have a queue here. So, let’s start with questions.
Earnings Call Part 2: