Freeport-McMoRan Inc. (NYSE:FCX) Jefferies 2023 Industrials Conference Call September 7, 2023 2:30 PM ET

Company Participants

Richard Adkerson - Chairman & Chief Executive Officer

Conference Call Participants

Christopher LaFemina - Jefferies

Christopher LaFemina

All right, everybody. Thank you for attending this afternoon session. I'm Chris LaFemina, the mining analyst at Jefferies. My pleasure to be hosting this session with Richard Adkerson, who is the Chairman and CEO of Freeport. And it's going to be an informal fireside chat. We'll take some questions from the room as well. But Richard, thank you for coming. We really appreciate you being here.

Richard Adkerson

Well, thanks, Chris. Thanks to Jefferies for hosting again this year. It's great to see all of you all, I don't know, I feel somewhere between a classroom and I'm testifying before some jury or something. But we've got a small enough group and we got some time.

I'm not going to have any formal comments. Freeport story is well known. And so, if any of you have questions, raise your hand and we'll just -- we'll take questions as we go along through here from the floor.

Christopher LaFemina

And maybe to kick it off, I'll ask the first question just about your outlook for copper. You were early in your views around energy transition demand which is now, I think, becoming much more of a consensus view. But can you just talk about demand outlook, supply outlook, how your view might be changing, if at all?

Richard Adkerson

Well, it was really before energy transition, which is a relatively new piece to the pie. I mean, it really started 20 years ago when I became CEO before we did the Phelps-Dodge deal and China was just emerging. Copper dropped down below $0.70 and nobody in the industry thought it was going to go to $1. And within 3 years, it was at $4 and it was not only China emerged at that time, but a factor that's becoming more and more evident now is that there's real barriers that emerged at that same time to resource development.

Historically, there've always been abundant copper supplies in the world and whenever prices went up, principally in Latin America, people go out and develop new mines and there was a real cycle. It was a combination of China and the fact that when China emerged with this new whole demand outlook, the resources that had been abundant previously were found to have not been there. And the quality of the mines was much weaker. Low-grade mines that required a lot of processing, a lot of cost to extract the copper and then underground mines political complications around the world got to be more and more real.

But today, there's a whole, I'll call it, the new era of demand because it is the new economy, energy transition artificial intelligent, data centers and all of that sort of thing. So, it's added something new to it and at the same time, the challenges for supply development continue to be strong.

I think it's striking this past year that the news out of China has been so negative. I mean every day, property markets, financial markets is so negative and yet China demand, which hasn't grown like it once did set records and inventories remain low. So even in this negative environment and with a world worrying about global recession, which it's better now than it was 6 months ago. Central Bank's activity, the fact that copper inventories remain low, prices have come off some but they haven't tanked. I'm just more and more encouraged about the commodity and more Freeport is placed in it.

Christopher LaFemina

And when you talk about -- I mean, industry has a lot of challenges on the supply side. You have a fairly substantial organic growth pipeline, including projects in the U.S. So, can you talk a little bit about kind of the cadence of that growth to the capital requirements for that growth? How you're thinking about investing in growth net versus capital returns? Just capital allocation in general?

Richard Adkerson

Yes. So, a real change during my career has been what's gone on in the U.S. I mean, one of your predecessors back in the early 2000 said Southwest copper district is dead, people were running away from it, two modern smelters, one by Phelps Dodge, one by what became BHP were dismantled, there's no investment.

Now -- and in some ways, when we acquired Phelps Dodge in 2007, people viewed the U.S. exposure as being a negative. Look at our segment information at Freeport, go in and look at our geographical segment information. I mean Grasberg is a great mine, I mean it's second largest copper mine in the world, largest single gold mine in the world. It gets more relatively value, the lower the copper price goes because it still makes money. But at Grasberg, we have 50% plus partner gets their share of the income. We have very high taxes and very high royalties. The government of Indonesia's participation in Grasberg is about 70% and FCX is about 30%. It's still a great asset, I'm not diminishing it at all. You don't see that in the consolidated financial statements because we consolidated. But you go to the U.S. where we own all the lands and fee where we mine, there's no royalties. We have very favorable taxes. The only good thing that came out of the oil and gas disaster with a net NOL carryforward. But the basic tax rate in the income tax rate, federal rate is low. And we have communities that support our workers in terms of schools and hospitals, education.

We make a lot of money in the U.S. in the copper business and it's really highly leveraged prices. If our view of the world and we can talk more about it, transpires and the shortage ultimately leads to very high copper prices. Freeport is going to do great in the U.S. because we have expansion, we have high levels of production. And our's a brownfield project, so we don't face the community opposition that greenfield projects face. So, it's really the future of our company. We have a great future in Indonesia. We're working to expand our operating rights beyond 2041. We got some growth opportunities in Latin America, great operations there. But the U.S. is really key and it kind of distinguishes us from others.

Christopher LaFemina

And can you talk about the timing for some of that growth in the U.S.?

Richard Adkerson

Well, that's a challenge, right? You -- even brownfield projects require lengthy permitting deals is we're working with the government. Right now, the U.S. government is focused on critical minerals and what it takes. We're trying to encourage them to make permitting more efficient. You got federal and state overlaps and timing. You need to put more resources, better resources on it to raise questions and get them answered quicker. We're not suggesting lower standards. I mean, environmental standards or anything, just make the process more efficient.

And then, you know this -- the uncertainties about China and the global economy is another factor that says don't rush -- inflation which you look at our second quarter, we did a better job than I expected in terms of managing cost. We still have fuel costs with oil prices going up. But look at the major capital projects have been done recently and what -- how much more they spent than people expected to spend and so that makes a company like ours, it's not under time pressure to push projects to say, let's make sure we understand what we're doing, how can we control costs and not let them get out of sight.

So, you got all these things working that says, don't rush, don't rush. In the meantime, we have this -- and I'll not comment on it, other than just point to it this leaching technology that's really important to Freeport. It can be very profitable, that doesn't have some of the same challenges in terms of permitting and carbon emissions and capital requirements. We're going to add volumes and make a lot of money off of it by avoiding some of these other challenges.

So, I don't -- I believe so much in the long run, that I don't want to take chances and screwing it up in the short run. We want to be very prudent to keep a strong balance sheet, keep our sales position. And if the world emerges as I'm getting increasingly confident that well, there's going to be a shortage of copper, prices will go higher, Freeport would do great.

Christopher LaFemina

What time horizon are you thinking about for these shortages and much higher prices? Is it 2, 3 years from now? Or is it 10 years now?

Richard Adkerson

Let's say 5 years. I don't know. It depends on how the world evolves. I just -- unless there's -- unless there's World War III or some global economic catastrophe, you can't -- in my view, you can't find a scenario where there's not going to be a shortage of copper. And when that happens, there will be technology conservation, substitution, project development, technology advances, all those things will come into play. But to me, it's clear, it's got to be in the context of much higher copper prices than we have today. And so, we got this big resource basis, high levels of production that's sustainable. We don't have the reinvestment risk that you have in some industries because of the long lives of the assets. It positions us to take advantage of that. And that's a strategic decision we made starting 20 years ago that to me, just keeps getting supported by newer developments.

Christopher LaFemina

And can you use M&A as a tool to increase your exposure there? Before those [indiscernible] actually kick in and prices are higher and valuations are higher?

Richard Adkerson

I wouldn't say it's a two-way -- M&A is coming to this industry because you've got some very well financed large companies with lots of resources. They keep talking about forward-looking commodities and wanting to be part of that world. They've been saying that for 20 years with remarkably little success and developing new resources and I think shareholders globally are asking companies more about growth now than capital returns which dominated the discussion for so many years. And that's going to be -- put pressures on management teams and Boards to do something. We don't have that pressure.

And so too -- when I look back, the best deals that have been made have been deals that are made on the basis of opportunities that arise as opposed to Boards or management saying strategically, we're going to go invest in aluminum. Are we going to do iron ore? Are we going to do this then another. So, we're positioned that if an opportunity came up for us to grow our company or be part and participate in an M&A deal that creates favor for shareholders, we're going to be prepared to do it, but we're not going to be an aggressive bidder for assets. We're not going to force the deal. But if a deal comes about where it makes sense for two companies to get together and do something together, we'll be prepared to act on it if it makes sense for our shareholders.

Christopher LaFemina

Like a Phelps Dodge tech deal, right? That was in that [indiscernible].

Richard Adkerson

Exactly. I mean I tried to get Phelps Dodge to buy our company for almost 10 years. Seriously. I mean, because I could see the match between Grasberg and Phelps Dodge's low-grade mines in the Americas, how they support each other and you can be more aggressive in the Americas mines. We've had Grasberg supporting it, they just didn't have the wherewithal to step up and do it. And then all of a sudden, the commodity prices ticked up, financial markets sold opened up and we were able to buy a company 3x our size. And thank God we did. I mean it's been great since then.

So, if that kind of deal opens up. And if companies restructure or other companies say, "Look, we're better off to be together and let's do something together" then we'll be prepared to do that. But to say we're going to go out and go into a bidding war for a company that's not likely at all.

Christopher LaFemina

So, we have 12 minutes left. What do we have in the room? There must be some questions out here.

Richard Adkerson

Yes.

Unidentified Analyst

Can you talk a little bit about how you see the price escalating? Is it going to be as commensurate as the demand for copper? And is there some way to offset that with some of the automation investments either above ground or underground? Can that help offset some of that cash cost escalation?

Richard Adkerson

Absolutely. And it is a step beyond just escalation, we're having a hell of a problem right now finding workers in the United States. I mean it's not in Latin America, not in Indonesia. But here in the U.S., I mean, you read about it across other industries, but man, when you're recruiting people to go work in remote areas, rural areas and mines and so forth.

Things changed with COVID. I think people enjoyed being home, they're willing to -- I think, balance compensation with other things in their lives. So, automation, we're taking a first step towards -- we've been watching the development of autonomous trucks that's been used in iron ore business and then the tar sand business, but not so much in our business, but we're introducing those into Baghdad, which is our mine, we have in Northwest Arizona that's very rural and very tough to get people. It has a housing problem and we got a big expansion project that is kind of being on hold until we can solve the people. That's one example of it, but technology is also helping us in other areas in mill efficiency and scheduling mining operations.

So, it's something we've got to do. And I think technology has also allowed us to expand our workforce by adding more women to the workforce. We particularly see that in Indonesia where underground, it's a lot more robotics than historically it would be. We got this great picture of Kathleen Quirk, our President with these popular women's running underground mining equipment, using like joysticks, but that's the future to help deal. Make it work more efficient to deal with the cost issue you raised, but also help address the issue for the challenge of getting enough workers.

Unidentified Analyst

Can you talk a little bit about the political risk in Indonesia? And how do you manage that as a company and as investors, how we should -- what can you tell us to help us get comfortable with that?

Richard Adkerson

So that's been the story of my life. I mean I was -- just a year ago this week, I was with the President of Indonesia, not only on his first visit out there but the first president since Suharto in the early '70s to go out there. And we were standing before the Grasberg open pit with 3 billion tons of rock taken out of it. It was finished. And I said February 1988 I was standing on that ridge before any of this happened and he was so engaged by about what we've accomplished and then we went underground.

Although we had the numbers, he was shocked to see how few ex Patriots. We have almost 30,000 workers there. And now 40% of our employee part of that worker force is pop ones [ph]. And we have senior Indonesian, young Indonesian engineers doing things. And we -- of course, we put them out in front of him to show them around and show him the underground and all this kind of stuff. But it's been quite a journey. I never thought I'd have this much patience in my life to deal with what we did there.

We didn't have the ability that oil companies have had or the coal companies had of walking away from Indonesia. That was our company. So we had to make it work. And we had a breakthrough deal at the end of 2018, beginning of 2017, I got -- did a news conference and threatened arbitration over there and that caused a firestorm. And -- but then we went to work and we did a settlement -- a broad scale settlement deal at the end of 2018, where we worked to get the Indonesian equity ownership up. Rio Tinto sold out, I was an investment banker in that deal. And that gave the Indonesian government a 40% interest ultimately in the project.

We agreed to build the smelter which now is more than 75% completed in Surabaya. It's the largest single line smelter in the world. It's a huge construction site but it's progressing on schedule and right now within cost budgets. And in return, they gave us assurance of operations through 2041. With fixed taxes, financial terms and importantly, allowed FCX to operate the business.

Since that time, that investment they made in Rio Tinto is just bloomed in value. We converted the operation into the largest underground operation ever done in the mining industry. We're mining over 200,000 tons a day underground there. And we've just been very successful and we're more and more -- it's an Indonesian company, PTFI is an Indonesian company, FCX is a shareholder, an operator of the company but it's majority owned by Indonesians. And so I was just with a group of Indonesians here yesterday from [indiscernible] and they were talking to just how the perception of Freeport has changed from being kind of the foreign investment with a black hat to being a positive contributor to the country.

And so it's a new world out there. I'm confident we will get an extension beyond 2041, need to do that quickly because we need to drill to see what's there and do long-term plans for investment how to maximize resources. So it has changed a lot. And I'd be happy to talk with you more about giving you comfort because there were times when it was white nail times over there and that's not the case now.

Unidentified Analyst

Sorry but even operationally, I mean, the fact that you developed the underground projects there as successfully as you did. You say they allow you to operate the asset but the operating traffic there is pretty remarkable?

Richard Adkerson

They're proud of it. I mean the product -- and even this year, we had a huge flood event in January, we had -- we went from a flood event in January to El Nino with dry weather and -- there's the wettest place on earth, by the way, the road leading up to Grasberg. It's just a fantastic place. But -- and then we had the administrative snafu with our export permit. And our team just come right out of it. I look forward to reporting third quarter results to you because we are -- the team is performing so well.

Unidentified Analyst

Richard, thanks for coming. Good to see you again. Taking the previous question a little further, the sort of resource nationalism that we're seeing around the world. Which areas and which geographies do you think are best and which geographies would you avoid like the plague?

Richard Adkerson

Years ago, I red lined Russia okay? So but -- there's no place to operate better than the U.S. I mean we got the rule of law, you've got a low-grade mines. I mean that's one thing you got to deal with. But man, if you can build community support like we have, got support by the Native American groups for our operations that we worked hard to do for over the years. It's just great to know that you've got -- like everybody, I'm just -- the current political situation in the U.S. is just appalling. But you do have the rule of law. You do have the rights to do what you want to do. You have right to work with workers in a way that's different. So that's good. Other places, it's amazing, you just got to get ready for change.

Time's running out. But before I joined Freeport, Freeport had the chance to take what is now the Rio Tinto interest in Escondida and didn't do it because of political risk in Chile in the 1980s. By the end of the '80s, we bet the whole company on Indonesia. Chile is the best place in the world to operate. Now it's complicated. I spent time with the young President of Chile when I was at APAC in Bangkok. And the countries face political issues, desires of the people. So you just got to be ready, be ready for those changes. And the problem in the mining business is you have to make all these big upfront investments. And at that time, the countries are romancing you. They want you to come in and spend the money.

Then the government changes, commodity prices change, oh this is a natural treasure and we need more of it. And so you just got to recognize that's the landscape of the world that you have to do and you can say it country after country after country that you go through that. All of that is another of these barriers to development that I think makes our industry so attractive. The demand side is through global growth and connectivity expanding and now the new economy side of things, the demand side is good but there's barrier after barrier to developing resources. And that's what is the basis for Freeport's strategy.

Christopher LaFemina

One more quick one in the room? Another minute to go. Richard, thank you again for taking the time today.

Richard Adkerson

Nobody asked about cybersecurity or when I was going to retire.

Christopher LaFemina

Well now that you mentioned it. What was that all about?

Richard Adkerson

Well, I'll tell you. This is annoying, I hope your companies never have to deal with it. These are just common crooks and they just try to put you in a corner and make you do something, we're fighting it so far successfully to keep us from having to do it. But it's -- I don't know why the authorities don't track these guys down and put them away because they really need to be.

Anyway, thank you for your attention. Really appreciate it.

Christopher LaFemina

Thanks, Richard.

Question-and-Answer Session