Freeport-McMoRan Inc. (NYSE:FCX) Q1 2024 Earnings Call Transcript

Freeport-McMoRan Inc. (NYSE:FCX) Q1 2024 Earnings Call Transcript April 23, 2024

Freeport-McMoRan Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Freeport-McMoRan First Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. David Joint, Vice President, Investor Relations. Please go ahead, sir.

David Joint: Thank you, Regina, and good morning, everyone. Welcome to the Freeport-McMoRan conference call. Earlier this morning, Freeport reported its first quarter 2024 operating and financial results. A copy of our press release with supplemental schedules and slides is available on our website, fcx.com. Today's conference call is being broadcast live on the Internet. Anyone may listen to the conference call by accessing our website home page and clicking on the webcast link. In addition to analysts and investors, the financial press has been invited to listen to today's call. A replay of the webcast will be available on our website later today. Before we begin today's – our comments, we'd like to remind everyone that our press release and certain of our comments on the call include non-GAAP measures and forward-looking statements, and actual results may differ materially.

Please refer to our cautionary language included in our press release and slides and to the risk factors described in our SEC filings, all of which are available on our website. Also on the call with me today are Richard Adkerson, Chairman of the Board and Chief Executive Officer; Kathleen Quirk, President; Maree Robertson, Senior Vice President and CFO; and other senior members of our management team. Richard will make some opening comments, Kathleen will review our slide materials and then we'll open up the call for questions. I would now like to call – turn the call over to Richard.

Richard Adkerson: Thank you, David, and thank you all for joining us. We're really pleased today to report our first quarter results. They reflect a continuation of Freeport's long-running success in executing our business plans. Kathleen will present our results, as David said, and then we'll answer your questions. Kathleen will become Freeport's CEO, effective with our Annual Shareholders Meeting on June 11. I will continue as Chairman and support Kathleen and our management team on important strategic issues and external relations. This will be the most seamless management transition in history. There's been a 20-year transition, in fact. Coincidentally, Kathleen joined Freeport shortly after I did 35 years ago and I've been an adviser to the company for the previous two decades.

She advanced through our finance group to become CFO when I became CEO 20 years ago. And since then, she has been integral to the management of the company. When I became Chairman three years ago, I made a personal commitment to build a sustainable Board and a sustainable management team. And since that time, we've added six high-quality independent directors, new directors, which together with our continuing directors comprise a very strong independent board to represent our shareholders. We bolstered our staff with internal promotions and external hires. Freeport is strongly positioned for the future, and I'm personally proud to be able to say that at this point. 20 years ago, we made a strategic commitment to copper based on the fundamentals of supply and demand for the commodity.

The validity of that commitment has never been more evident, and the best is yet to come. My personal enthusiasm for Freeport's future has never been stronger. I cannot be more pleased with our Board and with our management team under Kathleen's leadership. Kathleen, I'll turn the call over to you for your slides.

Kathleen Quirk: Great, and thank you, Richard. And a special thank you to you for your outstanding and visionary leadership during your long tender as our – tenure as our CEO. As I prepare to become CEO in June, I'm focused on our copper-leading strategy centered on reliable execution of our plans, disciplined cost and capital management and continuing our drive for profitable growth. Our seasoned team knows this business has a proven ability to navigate challenges and a passion for finding value in our assets. I look forward to building on our past success and to leading our company to new highs in the future. Starting on Page 3, Slide 3, we have a new annual report out with this year's theme being the value of copper. The report is available on our website.

It highlights our performance, our copper-focused strategy and our strength as a premier copper producer. We'll also be publishing our annual sustainability report, which will be available on our website later this week. This report, which we've been doing for some time now, details our environmental and social performance, which we take very seriously as part of our commitment to responsible production. On Slide 4, we present our key focus areas of – for 2024. These are the same items we discussed in our January call and we thought it would be good to show these again for reference so you can track our progress against these areas as we go through the year. On Slide 5, turning to the first quarter highlights. We're off to a really good start so far in 2024.

As summarized, we exceeded our guidance for first quarter copper sales. Gold sales were in line with our estimates and consolidated unit net cash costs were better than forecast. We generated strong margins and cash flows during the quarter with $2.5 billion in adjusted EBITDA and $1.9 billion in operating cash flows, and that was at an average copper price of $3.94 per pound. Capital expenditures, excluding $0.5 billion for the Indonesian smelter project totaled $800 million in the quarter, and we reduced our net debt. We made great progress on several important initiatives, including on the Indonesian smelter, which is scheduled to start up in June, building momentum in our innovative copper leach initiative and continuing to build optionality in our organic growth pipeline.

Market conditions are increasingly positive. They are growing recognition of factors, driving favorable fundamentals in copper and we've also seen a rise in gold prices year-to-date. Recall that Grasberg is one of the world's largest mines in terms of both copper and gold production. Moving to copper markets, starting on Slide 6, the growing intensity of use of copper in the global economy is supported by secular trends, particularly in electrification. Copper is a foundational, essential metal when it comes to electrification, and the world is becoming more and more focused on copper-intensive energy applications. New massive investment in the power grid, renewable generation, technology infrastructure and transportation are driving increased demand for copper and forecasts call for above-trend growth and demand for the foreseeable future.

This is occurring at a time when there are constraints on existing supplies, an absence of major new copper development projects and extended multiyear lead times for supply development, pointing to tight market conditions for an extended period of time. Copper producers, including us, at Freeport have been citing physical market tightness for some time. And in the last several weeks, the copper price has risen to reflect the reality of the market situation. Based on historical periods of above trend growth in demand, we may be in the early stages of a repricing for long-term copper prices. And we illustrate this on Slide 7, where we show how copper prices responded 20 years ago when China emerged as a major consumer of copper. You can see on this chart that within 12 months, the copper price increased by 40% and was up nearly four times within a three-year period.

During 2023, the secular drivers for copper demand provide a growth in demand despite weakness in some of the more cyclical drivers of copper demand. In the fourth quarter of last year, industry announcements of sizable supply disruptions tightened the market significantly. This is clearly evident when you look at the physical concentrate markets where smelters drop TC, treatment charges, sharply as a result of the shortage of concentrate supply. Notably, recent manufacturing data points also indicate that the global economy is recovering. Recently improved macroeconomic sentiment, combined with physical market conditions have driven prices higher, copper prices higher year-to-date, and many analysts are now projecting significantly higher copper prices in the future.

At Freeport, our financial performance is highly levered to copper prices, as you'll see from our sensitivities; we'll review later in the presentation. We're not predicting where prices will go from here, and recognize there will be volatility. But clearly, the fundamentals point to an extended period of deficits and significantly higher copper prices over the long term. That's very positive for a company like ours with large-scale, long-life producing assets and organic development opportunities. Now I will cover the operating highlights from the quarter. This is presented on Slide 8. We are summarizing the key operating highlights by geographic region. In the U.S., we continue to work to mitigate the impact of lower ore grades by focusing on initiatives to improve efficiency and reliability of our equipment, the productivity of our workforce and sharpening our focus on cost reduction.

We're making progress in these areas, but we still have work to do to regain our goal of being at the top of the industry in terms of efficiency and productivity. Our innovative leach initiative is providing incremental volumes and has helped us mitigate the impact of lower ore grades. As we previously reported, we reached over our 200 million pound per annum run rate, we've got several initiatives in progress to scale this to the 300 million-pound to 400 million-pound per annum range over the next two years. We're also continuing to take advantage of new technologies and automation across the portfolio, which we believe have a lot of potential to move the needle as we go forward. In South America, we – our ore milled was slightly below 400,000 metric tons of ore per day at Cerro Verde.

Team worked through several challenges during the quarter associated with material types, which required optimizing mill throughput to address recoveries. And the team was successful in achieving copper volume targets by increasing mine rates and accessing higher than planned grades. Our moly byproduct volumes were impacted, however, by low recoveries associated with the material types and progress is being made to address this. At our El Abra mine in Chile, we had a good quarter, and we met expectations. We are also pleased to report that Cerro Verde recently finalized an agreement for a new four-year labor agreement with its workforce. In Indonesia, we had another exceptional quarter of performance. Both copper and gold production exceeded our forecast with higher mill rates, higher ore grades and recoveries.

A large open-pit copper mine with heavy machinery extracting minerals from the earth.

Our net unit cash costs for the quarter in Indonesia was a net credit of $0.12 per pound. That means our gold byproduct credits more than offset all of the cash production costs. Our underground ore mined, which is the largest block-cave mine district in the world averaged 220,000 tons per day that was above the fourth quarter of 2023 and significantly above last year's first quarter. The Grasberg Block Cave mine is our largest in the district, and it continues to achieve strong performance. We've also increased our rates at the extra high-grade smaller mine at Big Gossan by nearly 30%. Our new SAG mill, which we installed at the end of last year, is performing very well. We're nearing completion of a mill recovery project, and that will enable higher mill recoveries in the future.

And our team there is just doing outstanding work in sustaining and optimizing value from this large resource position. Topping it off the PT-FI team recently finalized a new two-year labor agreement with our workforce. Give a report on Slide 9 of where we stand with our smelter project and the completion of this new smelter in Indonesia is a very important catalyst for us, as we work to secure an extension of our long-term operating rights in Indonesia. We made substantial progress in the first quarter and now we're focused on the remaining critical path and transitioning to commissioning and start-up activities. We're on track to begin hitting the furnaces during June, followed by concentrate process in August and first cathode in October.

We're working closely with the Indonesian government to continue to export concentrates and anode slimes until the smelter and precious metals are fully operational, and we expect that by year-end when we will become a PT-FI, a fully integrated metals producer. Discussions with the government to-date are positive and that's supported by the project status and the startup plans. In terms of our startup, we have a very talented local team who will be supported by a large team of Freeporters from around the globe, including from our Spanish operations and our U.S. smelting operations to support an efficient startup. We're very focused on our growth and optionality in our growth pipeline, and we've got a summary on Slide 10, where we go through where we stand on the various projects.

We have dedicated teams working on advancing opportunities to grow production in the future. And here, you'll see the update for each of the major initiatives underway, starting with the innovative leach initiative where our team has several work streams in progress to take our initial success and build substantial scale. This project has the highest net present value potential of any project we have seen historically because of low capital intensity, low incremental operating costs. And at Freeport, we're uniquely positioned to capture this value with our sizable existing footprint, technical know-how and new technologies available to us. At our Bagdad operation in Northwest Arizona, we talked about it on our last call. And now we're continuing to take steps to derisk the brownfield expansion project by converting the existing haul truck fleet to fully autonomous, expanding housing infrastructure at the site and expanding our tailings facilities.

We're also continuing to monitor labor market conditions in Arizona and hope to be in a position to make an investment decision by the end of next year. From there, the project would take about three to four years to construct. At our Lone Star, Safford brownfield project in Eastern Arizona, we're commencing a pre-feasibility study this year to define and frame a major expansion. As we've been talking about over many quarters, we have a sizable resource here and expect this district will become a major cornerstone asset for us in Arizona during the next decade. At El Abra, in Chile, we have a large resource that can support a new concentrator of scale and we're looking at a concentrator similar to the size of the Cerro Verde concentrator expansion we installed nearly 10 years ago.

We've done substantial work to define the project, and we're currently in the process of retesting the economics and taking a hard look at capital costs in light of the recent industry experience in Chile. We're working to be in a position to file an environmental impact statement by the end of next year, and this project would require seven to eight years of lead time because of permitting requirements. In Indonesia, we're continuing to advance our large-scale Kucing Liar development to commence production by 2030. We also have several additional exploration targets in the district and expect to have additional long-term development options that would become available with an extension of our operating rights beyond 2041. We're going to continue to be disciplined in our approach, targeting opportunities that can be executed efficiently and profitably and where we think we can create value for our shareholders.

We wanted to take you through a little bit of our leach history on Slide 11 that provides history of what we've achieved to-date on this innovative project. We started on this journey two years ago with data analytics and new operating practices to tap into our large stockpiles to recover copper from material that was previously mined. Through a combination of actions to achieve greater heat retention in the stockpiles, gaining access to areas of the stockpiles that had not been optimally leached historically, and through the use of better identification of trap potential, we’ve been successful in adding incremental copper previously thought to be unrecoverable. This initiative has grown now to be a major value driver for our Americas business, particularly for our largest U.S. mine in Morenci.

As we mentioned, we achieved our initial target for an annual run rate of 200 million pounds per annum, now focused on doubling this or scaling what we’ve learned to date. To date, the success has largely been operationally driven, complemented by new data and technology. At the same time, in parallel, we’re advancing studies on new additives that could boost recoveries and we’re exploring options for adding heat to existing stockpiles to generate incremental copper. In the aggregate, these initiatives have the potential to reach 800 million pounds per annum and that’s the equivalent of a large-scale copper mine with low capital intensity, low cost and a low carbon footprint. About half of this can be achieved through further scaling, as we mentioned, and the other half relates to technology under development.

The value potential is very attractive, particularly for Freeport given our large quantities of suitable materially – material that we previously mined. In terms of our timing of all this on Slide 12, we summarized potential growth and that we frame it in near-term, medium-term and longer-term horizons. We’ve outlined identified projects in the Americas, totaling 1.7 billion pounds and the Kucing Liar project currently in development in Indonesia, and that’s expected to continue to support long-term production profiles in the Grasberg District. In the two to three-year category, we set our focus on incremental production, on scaling our leach initiatives and operational improvement projects. Together, the potential from these opportunities total 400 million pounds and do not require significant investment or long lead times.

In three to five-year category, we’ve got the Bagdad expansion opportunity and the additional potential from our leach initiatives. El Abra is reflected in the seven to eight-year category and Lone Star is not on here, but it’s also a major opportunity, which we’re currently defining. It’s likely a bit further out, but we feel it will be a major new opportunity for us as we go forward. The KL development in Indonesia is proceeding on schedule. We expect to commence production before 2030 and ramp up to over 500 million pounds of copper and 500,000 ounces of gold, which is meaningful operation. In Indonesia, an extension of our rights beyond 2041 would open substantial opportunity for reserve and resource expansion and continuation of large-scale mining in one of the world’s largest and highest grade copper and gold mining districts.

We’re in a strong position, as you see here, to continue our leadership role in supplying copper to a world with growing requirements. On Slide 13, as we usually do, we show our three-year outlook for sales volume of copper, gold and molybdenum. We’ve increased our 2024 copper sales by about 1.5%, reflecting the first quarter outperformance. The rest of the guidance is similar to our outlook at the start of the year. We’re also estimating consolidated net unit cash costs to approximate $1.57 per pound on a consolidated basis that’s slightly below our previous guidance of $1.60 per pound. We’ve got some details of the makeup of this average presented on Slide 25 in the restaurants materials. With a strong cash flow generator, as you can see on Slide 14, where we show modeled results for our EBITDA and cash flows at various copper prices ranging from $4 per pound to $5 per pound for the average of 2025 and 2026.

We’re using our current volume estimates for 2025 and 2026, our cost estimates and we’re holding gold flat here at $2,300 per ounce and molybdenum at $20 an ounce for illustration. Under this scenario, annual EBITDA would range from almost $11 billion per annum at $4 copper to in excess of $15 billion per annum at $5 copper and our operating cash flows would range from over $7.5 billion per year at $4 copper and over $11 billion per year at $5 per pound copper. We’ve got sensitivities to the various commodities on the right with long life reserves, large-scale production; we’re extremely well-positioned to benefit from improved pricing, providing substantial cash flow for investments in our organic growth and cash returns to shareholders on our performance-based payout framework.

On Slide 15, we show our current estimates for capital expenditures for 2024 and 2025. Not much has changed since our last update. $3.6 billion is projected for 2024, which is consistent with our prior guidance. And in 2025, we estimate CapEx will total about $3.9 billion. That’s about $100 million higher than the January estimate and reflects timing changes for our Kucing Liar project spend for 2025. During this period – during this two-year period, discretionary projects totaled $2.5 billion. This is – this category reflects the capital investments we're making in new projects that under our financial policy, are funded with the half of available cash that is not distributed. And these projects are all value-enhancing initiatives, and we've got some details in the back – in the reference materials.

Finally, getting to financial policy on Slide 16. We reiterate the policy priorities centered on a strong balance sheet, cash returns to shareholders and investments and value-enhancing growth projects. Balance sheet continues to be very strong. We've got great metrics – credit metrics and significant flexibility within our debt targets to execute on our projects. As indicated here, we've distributed about $4 billion to shareholders through dividends and share purchases since starting this new financial policy and we've got a very attractive future long-term portfolio that will enable us to continue to build long-term value for shareholders. A sustained higher price for copper will drive higher cash returns to shareholders while allowing us to invest in future value-oriented growth.

We're going to continue to actively monitor the market conditions. We'll carefully manage the timing of our projects and make sure that our financial flexibility remains strong. In closing, our global team is driven by value, and we continue to focus on what matters in our business by executing our plans responsibly, safely and efficiently and maximizing the value of our vast resources. We thank you all for your attention, and we'll now open up the call for questions.

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To continue reading the Q&A session, please click here.

Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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