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Freeport-McMoRan (NYSE: FCX)
Q3 2024 Earnings Call
Oct 22, 2024, 10:00 a.m. ET

Freeport-McMoRan Reports Strong Q3 Performance: What Investors Need to Know

Key Highlights from the Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Opening Remarks by Freeport-McMoRan’s Leadership

Operator

Welcome to Freeport-McMoRan’s third quarter 2024 conference call. [Operator instructions] I’ll now hand the call over to Mr. David Joint, Vice President of Investor Relations. Please go ahead, sir.

David P. Joint — Vice President, Investor Relations

Good morning and welcome, everyone, to the Freeport conference call. This morning, we reported our third quarter 2024 operating and financial results. The press release, along with supplemental materials, can be found on our website at fcx.com. Additionally, our conference call is being streamed live online.

Anyone can participate by visiting our website’s homepage and clicking on the webcast link. Analysts, investors, and the financial press have been invited to join today’s call. A replay will be accessible on our website later today. We want to remind everyone that the press release and certain comments on this call discuss non-GAAP measures and forward-looking statements; actual results may differ significantly.

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Please review the cautionary language in our press release and slides, along with the risk factors outlined in our SEC filings, available on our website. Joining me on the call today are Richard Adkerson, Chairman of the Board; Kathleen Quirk, President and CEO; Maree Robertson, Executive Vice President and CFO; and other senior members of our management team. Richard will deliver some opening remarks, Kathleen will go over the slide materials, and afterward, we’ll open up for questions.

Richard?

Richard C. Adkerson — Chairman of the Board

Thank you, David. I appreciate everyone taking the time to join us today. It was a solid quarter, with strong outcomes that reflect the excellent performance from our global Freeport team. I am very proud of their work as we look ahead. The outlook for our company and for copper, which underpins our strategy, looks bright.

Kathleen will discuss the quarterly results and progress on our new smelter in Indonesia. We have appointed a new president in Indonesia, Prabowo Subianto. I worked closely with Prabowo when he was a general three decades ago on various operational matters in Papua. His extensive knowledge and experience will be a significant asset as we continue to collaborate effectively with the current administration.

Kathleen, I’ll now pass it over to you.

Operational Performance and Strategic Initiatives

Kathleen L. Quirk — President and Chief Executive Officer

Thank you, Richard. I will begin with our slide presentation, starting on Slide 3, which outlines the highlights for the third quarter and the first nine months of 2024. Our team is effectively executing our operating plans while pushing for improvements through cost management and organic growth opportunities. We achieved impressive margins and cash flows in this quarter, with $2.7 billion in EBITDA and $1.9 billion in operating cash flows.

Sales volumes for both copper and gold exceeded our expectations, contributing to positive unit cash cost performance compared to our guidance and last year’s figures. Our ongoing commitment to organic growth is strong. Freeport maintains a significant reserve and resource base, with growth options at various stages. Our innovative leach technologies are yielding positive results, and we have multiple projects aimed at increasing low-cost copper volumes.

In the first nine months of 2024, our incremental copper production from the REACH initiative saw a remarkable increase of nearly 70% compared to the same period last year. Additional projects are underway to enhance our U.S. cost structure and support brownfield expansions for sustained growth in response to the rising demand for copper. During Q3, we bought 5.3 million shares of Cerro Verde for $210 million. This investment boosts our ownership in this valuable asset from 53.6% to 55%.

Cerro Verde now represents about 4.3% of our outstanding shares. Financially, we ended the quarter on strong footing. Looking ahead, we maintain optimism regarding the markets we serve, our extensive portfolio of copper assets, and our ability to generate strong cash flows, which will support investments as well as returns to our shareholders.

Copper Market Overview

Moving to Slide 4, we note that copper prices during Q3 fluctuated widely. On the London Metal Exchange (LME), prices ranged from $3.91 to $4.47 per pound, while on the COMEX exchange, they fluctuated between $3.94 and $4.66 per pound. The LME’s average settlement price for the quarter was $4.18 per pound. Price movements were influenced by global economic data and pressures in China, balanced against the Federal Reserve and other central banks’ plans to reduce interest rates, along with potential economic stimulus in China.

On a micro level, we observe consistent demand trends driven by increasing energy and infrastructure investments, reinforcing our market’s strength and our company’s strategy.

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Strong Demand for Copper Drives Future Growth at Freeport-McMoRan

Electrification efforts have created a robust demand for copper, effectively counterbalancing any slowdowns in cyclical markets. In the United States, customers report heightened needs for power cable and building wire, fueled by major investments in electrical infrastructure and AI data centers. This surge in demand is more than compensating for declines in traditional sectors like residential construction and automotive. Similarly, in China, strong investments in the electric grid and the production of electric vehicles continue to support copper demand.

Interestingly, China’s copper consumption remains strong even amid struggles in its property sector. Recent announcements of economic stimulus in China aim to bolster growth and could further accelerate metals demand through 2024 and into 2025. Copper, often referred to as a foundational metal, plays a vital role in electrification due to its unique physical properties and excellent conductivity.

Massive investments in power grids, renewable energies, technology infrastructure, and transportation are driving higher demand for copper, with forecasts suggesting growth will exceed historical trends for the foreseeable future. When we analyze supply alongside these demand fundamentals, it becomes clear that the market remains tightly balanced in the short term, with potential deficits in the longer run. This situation necessitates new investments and innovative technologies to increase supply long-term. Freeport-McMoRan is committed to supplying copper reliably and responsibly to meet this growing market need.

Positioned as an industry leader, Freeport-McMoRan benefits from its large-scale operations and future growth opportunities. Additionally, it’s worth noting that the company is a significant gold producer and is also enjoying rising gold prices. To provide an overview of our operational performance, let’s refer to Slide 5, summarizing quarterly results by geographic region. Within the U.S., efforts to enhance efficiencies and boost cost performance are ongoing, especially to counteract the impacts of lower-grade materials.

While progress is ongoing, recent trends show improvements. We are closely monitoring key metrics and observing positive developments in asset efficiency, particularly concerning loading, hauling, crushing, and stacking operations. A significant focus remains on improving equipment reliability and reducing unplanned downtimes. Efficient use of contractors is also being optimized to curtail costs, ensuring internal resources are concentrated on priority areas.

Moreover, our REACH initiative is contributing to lowering our cost structure, while in South America, the Cerro Verde operation has recorded another solid quarter. Mill throughput surpassed 420,000 metric tons of ore daily, and recovery rates improved compared to last year’s third quarter. Importantly, our net cash costs were slightly lower than a year ago, excluding a $0.12 per pound nonrecurring charge linked to a new labor agreement.

After successfully negotiating with Cerro Verde’s secondary union, multi-year labor agreements are now in place for the hourly workforce. As stated earlier, we also increased our stake in Cerro Verde, enhancing our investment in these valuable, long-lived, high-quality assets. In Indonesia, noteworthy performance is highlighted by a net cash credit of $0.71 per pound, with our team consistently delivering strong volumes of copper and gold from our extensive underground deposits.

Sales this quarter exceeded initial expectations, driven by improved mill rates and ore grades. Additionally, robust gold sales indicate good production outcomes and decreased inventory since June 30. Moving forward, we will focus on executing our operational plans effectively, commissioning a copper cleaning circuit in Papua to optimize mill recoveries, and restoring smelter operations following a recent fire.

Regarding the smelter, we have made significant progress in commissioning and start-up throughout the third quarter. However, we did experience a setback from a fire incident in a gas cleaning facility on October 14. Fortunately, our safety protocols were effective, ensuring no injuries to personnel as the fire was managed quickly.

In response to the incident, start-up activities are currently on hold as we evaluate damage and develop recovery plans. The affected area is limited, and our teams are actively planning repairs and assessing timelines for equipment replacement. We anticipate that repair costs will be covered by insurance, and we’ll work with the Indonesian government to maintain concentrate exports during this downtime. Importantly, mining operations in Papua are continuing unaffected, with a goal of restoring smelter operations safely and efficiently. Achieving our aim of becoming a fully integrated producer in Indonesia is crucial for securing long-term operating rights there.

The progress of our innovative REACH initiative remains encouraging. Early results indicate substantial value potential, having already hit our initial target of a 200 million-pound annual copper run rate by the end of last year. Efforts are now directed toward scaling this initiative to deliver 300 to 400 million pounds per year within the next couple of years, with an ultimate ambition of reaching 800 million pounds annually. This expansion aligns with the capacity of a major new mine, requiring minimal capital investment and low operational costs, enhancing the value and competitive positioning of our operations in the Americas.

Slide data depicts significant volume growth from our initiatives over recent quarters. Our achievements arise from improved heat retention in leach stockpiles, harnessing sensor and analytics data to identify targets, and deploying new operational strategies for solution injection in previously inaccessible areas. Our goal is to bolster the run rate to 300 to 400 million pounds annually by 2026, employing innovative methods such as expanding the leaching surface area via helicopter installations in hard-to-reach zones and optimizing targeted solution injection wells.

Progress in leach injection technology and drilling efficiency further supports our objectives, fostering rapid well development. Concurrently, advancements in innovation-driven initiatives continue to strengthen our aim of achieving 800 million pounds annually. We believe substantial opportunities lie ahead with enhanced heat application to stockpiles, exploring methods of utilizing external energy or pyrite-hosted ores for added thermal generation.

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Freeport’s Expansion Plans and Financial Outlook Assessed

Strong Growth Initiatives in U.S. and Chile

Freeport-McMoRan is focused on leveraging its existing operations for growth, particularly through brownfield projects, as outlined in the latest presentation. The company is pursuing a leach-out initiative aggressively, which represents its best near-term growth opportunity. Their U.S. operations, specifically at Bagdad and Safford/Lone Star, are set for expansion. Investments in automation, tailings management, and energy infrastructure at Bagdad are underway, ensuring readiness when conditions are optimal. The company anticipates making a decision on these expansion plans next year without significant regulatory hurdles.

The Safford/Lone Star region also presents substantial potential, with targets aiming to more than double current production from 300 million pounds annually. This area could serve as a cornerstone asset for Freeport and the state of Arizona over the next decade. In Chile, Freeport’s collaboration with Codelco is advancing, with pre-feasibility studies completed and an environmental impact statement expected by the end of next year. The project, similar in scale to Cerro Verde, aims for 750 million pounds of annual copper production and 9 million pounds of molybdenum production.

Long-term Strategy and Global Developments

While the El Abra project in Chile is significant, it requires a seven to eight-year timeframe for permitting. Freeport remains confident this investment is crucial for meeting future copper demand. In addition, the company is making headway on the Kucing Liar development in Indonesia, targeting production commencement by 2030. Encouraging exploration results under the Deep MLZ ore body suggest potential for extending operating rights beyond 2041, paving the way for further long-term developments in the region.

The company’s focus on building optionality is commendable. By pursuing disciplined initiatives, Freeport aims to enhance long-term value, as reflected in their three-year outlook for copper, gold, and molybdenum sales.

Financial Projections and Capital Expenditures

On Slide 9 of the presentation, Freeport provided insights into projected sales guidance and updated estimates for unit net cash costs. For 2024, the average cost is estimated to be around $1.58 per pound, down from previous projections. Anticipated sales show an EBITDA range of $11 billion at $4 copper, rising to approximately $15 billion at $5 copper. Freeport is highly sensitive to copper price fluctuations, with each $0.10 increase correlating to about $420 million in annual EBITDA. The company is also positioned to benefit from rising gold prices.

Moving to capital expenditures, Freeport’s forecast for 2024 is approximately $3.6 billion, with a slight increase to about $4.2 billion projected for the following year. Over this period, discretionary projects will total $2.5 billion, emphasizing the company’s commitment to value-enhancing investments. Slide 23 offers further details on these initiatives.

Commitment to Shareholder Returns

Freeport’s financial strategy prioritizes a robust balance sheet and consistent cash returns to shareholders. The company has distributed $4.5 billion through dividends and share buybacks since implementing its present framework. Analysts can look forward to continued investments aimed at boosting long-term shareholder value. The finance team is dedicated to executing planned investments effectively while ensuring profitability.

In closing, Freeport-McMoRan’s commitment to these growth initiatives highlights its strategic foresight and position in the mining sector. The company is fully prepared to respond to market conditions and execute its outlined plans, fueling future growth.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Chris LaFemina with Jefferies. Please go ahead.

Chris LaFemina — Analyst

Thanks, operator. Hi, Kathleen. Hi, Richard. I hope you’re doing well.

Just wanted to ask a couple of questions about Indonesia. And first, on the smelter fire with the insurance. Kathleen, you mentioned …

Insurance Coverage and Export Challenges: Insights from Kathleen L. Quirk

Kathleen L. Quirk — President and Chief Executive Officer

Our insurance policy is focused on construction. While it will cover repair costs, it does not include business interruption coverage. Although the affected area is crucial for copper refining, it is relatively small. Our primary goal is to complete repairs promptly and maintain discussions with the government.

It’s essential to keep the concentrate flowing. We have some flexibility within our current shipping quota for 2024, and we will seek additional leeway to ensure all production can be exported that year. Depending on how long repairs take, we will negotiate with the government on continuity for the affected portion of 2025. The government stands to gain more than 70% of the economics through taxes, royalties, and dividends, making it mutually beneficial to minimize interruptions.

Chris LaFemina — Analyst

Thank you for the clarification. I have a follow-up regarding Indonesia. Pertaining to the $1 billion in restricted cash, which represents about 30% of the export proceeds held in Indonesian banks for 90 days, will this restriction remain even after the smelter operation begins?

Kathleen L. Quirk — President and Chief Executive Officer

Yes, Chris. The regulation applies to all exports in Indonesia, not just copper. It was established by the government last year in response to fiscal concerns. The cash will remain restricted unless there are regulatory changes. It’s important for various exporters, including oil companies. While the funds are set aside for 90 days, we can withdraw them afterward as they earn returns while held in deposit.

Chris LaFemina — Analyst

Thanks for that clarification.

Operator

Next, we have a question from Liam Fitzpatrick with Deutsche Bank. Go ahead.

Liam Fitzpatrick — Analyst

Good morning. I have a few additional questions about the smelter. While I know you’re still evaluating the situation, can you provide a rough estimate of the potential delay? Are we looking at three months or possibly longer? Also, regarding government approvals for export extensions, do you anticipate this will be a straightforward process, or is there a risk it could go beyond year-end?

Kathleen L. Quirk — President and Chief Executive Officer

Thank you, Liam. We currently cannot provide a timeline for repairs as this incident occurred only a week ago. Our teams are on-site assessing the damage and determining which equipment needs replacing. We are also collaborating with our vendors to get an idea of lead times for necessary replacements. Fortunately, structural damage was minimal, but some piping and equipment will require fabrication rather than quick delivery. Our vendors have been responsive, which is encouraging given today’s market conditions.

The government has provided support, including its fire department, and is investigating the causes alongside us. We acknowledge that incidents like this have occurred before in Indonesia, and regulators understand the complexities of operating smelters. Their awareness of our sincere efforts to complete construction is reassuring, as is their understanding of the economic benefits of ensuring continuity.

As for the Cerro Verde stake increase, we’re open to acquiring more shares if opportunities arise. Investors were interested in selling recently, leading us to acquire some shares. This investment is a quality asset, and finding additional shares depends on market conditions and willing sellers.

Liam Fitzpatrick — Analyst

Thank you for your insights.

Operator

Bob Brackett from Bernstein Research will ask the next question.

Bob Brackett — Analyst

Hi, good morning. I have a question regarding Indonesia, specifically about IUPK. If I look closely at the second quarter versus the third quarter, there was an expectation that you might file…

Freeport-McMoRan Discusses Future Initiatives and Operational Efficiency

In a recent conference call with analysts, executives at Freeport-McMoRan provided updates on company projects and financial expectations.

Updates on the IUPK Extension

Kathleen L. Quirk — President and Chief Executive Officer

The conversation turned to the IUPK extension, with some analysts noting a lack of clarity regarding its progress. Quirk reassured stakeholders, saying, “We feel confident that it will happen.”

Richard C. Adkerson — Chairman of the Board

Adkerson added historical context by describing past hopes for achieving the extension during President Joko Widodo’s administration. However, delays caused by the recent presidential transition hindered this process. “There’s an established regulation in place that provides us the ability to file for it,” he stated, highlighting Freeport’s commitment to work with the new government on timing.

Insights on Safford/Lone Star Development

Bob Brackett — Analyst

When asked about the pre-feasibility study in the Safford and Lone Star areas, Quirk elaborated on the significant potential of these sites. They have uncovered a resource that far exceeds current reserves and is located near Morenci, a longstanding Freeport operation.

“Safford is one of the newest mines in the U.S., launched around 2007–08, and we see potential for it to become another cornerstone asset,” she noted. Currently, Safford operates with a leaching process, but plans are underway to incorporate milling operations, which could significantly enhance production capacity.

Quirk stated, “Our goal is to increase output from 300 million pounds of copper per year to 600 million,” and emphasized the company’s focus on designing an expansion plan based on these findings. With positive community support and a robust resource foundation, Freeport aims to ensure this initiative remains viable for the long term.

Cost Efficiency and Labor Market Updates

Michael Dudas — Analyst

Dudas inquired about the company’s efficiency initiatives in light of rising costs. Quirk explained how Freeport has faced challenges with cost increases, especially linked to lower-grade materials. However, she expressed optimism with recent trends indicating a stabilization in cost increases, particularly in energy prices.

Quirk illustrated that while operational costs were previously comparable between North American and South American operations, they now show a significant gap due to grade discrepancies. “We’ve made progress in improving productivity by better training our workforce and refining equipment efficiency,” she noted, indicating the company’s commitment to enhancing their operations.

Freeport has also focused on reducing contractor dependence, seeing about a 10% reduction in external contractors. Additionally, they are scrutinizing supply chain costs to push back against unwarranted price increases, seeking a balance where vendors can still make reasonable returns.

Quirk concluded, “We have multifaceted initiatives going on… We are continually working on achieving better asset availability and productivity metrics.”

Freeport-McMoRan Works Toward Cost Reductions Amidly Changing Market Dynamics

No Immediate Grade Improvement, But Cost Efficiency is the Goal

Kathleen L. Quirk, President and CEO of Freeport-McMoRan, emphasized that while improving grades may not be a priority, reducing operational costs remains a significant focus. The company is committed to tracking key performance indicators to enhance efficiency and consequently lower costs. As the team aligns their targets, Quirk anticipates a decrease in unit costs in the U.S. by 2025 if input costs stabilize. Josh Olmsted, President and COO of Americas, corroborated this strategy, highlighting the importance of managing contractor expenditures and ensuring equipment reliability to drive down costs.

Industry Comparisons and Future Projections

Currently, North American production costs hover above $3 per pound, while South American costs are around $2.50. Analyst Orest Wowkodaw from Scotiabank raised questions about future cost predictions. Quirk responded, indicating that while costs in North America might stabilize between $2.50 and $3 per pound, the company aims to leverage its REACH initiative. This initiative is focused on maximizing output from already mined materials at significantly lower costs, targeting average production closer to $1 per pound as it scales up. Such strategies could reshape Freeport’s cost structure, particularly in U.S. operations such as Morenci and Safford.

Anticipating Costs and Capital Allocation Decisions

Subsequently, questions arose concerning the trajectory of production costs. Quirk reiterated her anticipation that by 2025, production costs would decrease from their 2024 figures, contingent on stable prices for molybdenum and other inputs. Analyst Daniel Major from UBS inquired about Freeport’s approach to mergers and acquisitions (M&A) and buyback strategies. Quirk underscored their commitment to a balanced approach in cash allocation, with plans for share repurchases should surplus cash flow permit, following their established financial framework.

Strategizing for Future M&A Opportunities

As Freeport continues observing market trends, Quirk and Chairman Richard C. Adkerson remain vigilant regarding potential M&A opportunities within the mining sector. While Adkerson believes significant transactions are on the horizon, he also clarified that M&A is not a core element of Freeport’s strategic plan. Freeport-McMoRan is keen on exploring options that align with its goals and capabilities while maintaining a robust discussion around shareholder returns and growth strategies.

Freeport-McMoRan Discusses Capital Strategies and Project Updates in Recent Q&A

Company’s Focus on Organic Growth Amid Market Opportunities

In a recent earnings call, Freeport-McMoRan’s executives emphasized their commitment to organically increasing shareholder value, while remaining attentive to market opportunities. As CEO Kathleen L. Quirk clarified, successful mergers and acquisitions typically arise from responsive opportunities rather than predetermined strategies. This approach aligns with their broader goals as they navigate the complexities of the market.

Capital Allocation Strategy Under Review

Analyst Lawson Winder from Bank of America Securities raised questions about Freeport’s capital allocation, particularly regarding major projects like Bagdad, El Abra, and Lone Star. Quirk noted that the company is already prepared to advance the Bagdad project in the near term, with studies for Lone Star expected to provide necessary data by the end of next year.

Quirk explained that while Bagdad can be executed in a three- to four-year timeframe, evaluative processes for Lone Star and Safford will take longer. With an impressive 80-year-plus reserve life at Bagdad, Quirk sees it as a strategic investment opportunity. By leveraging their various assets, Freeport aims to focus on projects that promise the greatest returns.

2025 Capital Expenditure Plans Remain Steady

When questioned about capital expenditures for 2025, Quirk reassured investors that no major changes are anticipated. Plans include investments that will help de-risk the Bagdad project and improve existing infrastructure. Although adjustments may arise as new opportunities present themselves, the current estimate for 2025 capex aligns closely with previous projections.

Update on Near-Term Projects

J.P. Morgan analyst Bennett Moore sought information about smaller, discretionary projects listed in their presentation. Quirk provided updates indicating that the Lone Star oxide expansion is nearing completion and will sustain production at approximately 300 million pounds of copper annually. Further improvements at the Grasberg mill are underway, including the addition of a new copper cleaner designed to enhance recovery rates.

At Atlantic Copper, a new recycling circuit is under development, which is expected to begin production by the end of next year. While not significantly impactful on the wider Freeport operations, it represents an opportunity for Atlantic Copper to diversify its business, particularly in the context of lower Treatment and Refining Charges (TCRCs).

Grasberg Cleanup Efforts Yield Positive Results

Moore also inquired about the progress of cleanup work at the Grasberg site, to which Quirk responded positively, highlighting successful operational achievements and a higher output than anticipated. The continued improvements reflect Freeport’s commitment to efficiency and environmental responsibility.

Overall, Freeport-McMoRan remains focused on strategic resource management, capitalizing on valuable projects while adapting to the market landscape.

FCX Conference Call Recap: Leadership Insights and Future Outlook

Kathleen L. Quirk — President and Chief Executive Officer

Thank you all for participating today. Your questions are appreciated.

Operator

I’ll now hand the call back to management.

Kathleen L. Quirk — President and Chief Executive Officer

Thank you, Regina, and thanks to everyone for your valuable questions. We will continue to keep you updated. For any follow-up inquiries, please reach out to David.

Operator

[Operator signoff]

Duration: 0 minutes

Conference Call Participants

David P. Joint — Vice President, Investor Relations

Richard C. Adkerson — Chairman of the Board

Kathleen L. Quirk — President and Chief Executive Officer

Chris LaFemina — Analyst

Kathleen Quirk — President and Chief Executive Officer

Liam Fitzpatrick — Analyst

Bob Brackett — Analyst

Richard Adkerson — Chairman of the Board

Michael Dudas — Analyst

Josh Olmsted — President and Chief Operating Officer, Americas

Mike Dudas — Analyst

Orest Wowkodaw — Analyst

Daniel Major — UBS — Analyst

Lawson Winder — Analyst

Bennett Moore — JPMorgan Chase and Company — Analyst

For more analysis on FCX, see our ongoing coverage.

Note that this transcript is prepared by The Motley Fool for informational purposes. While we strive for accuracy, errors may occur. We strongly recommend that you conduct your own research, including reviewing the company’s SEC filings and listening to the call.

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