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Freeport-McMoRan Inc (NYSE: FCX) First Quarter 2021 Earnings Conference Call, April 22, 2021, 10:00 AM Eastern Time

Ladies and gentlemen, thank you for your support. Welcome to the Freeport-McMoran first quarter conference call. [Operator Instructions] Now I want to transfer the meeting to Ms. Kathleen Quirk, the President and Chief Financial Officer. Please go ahead, madam.

Kathleen Lynne Quirk - President and Chief Financial Officer

Thank you, good morning, and welcome to the Freeport-McMoran conference call. We published our results this morning, and a copy of today’s press release and slides are available on our website fcx.com. Our call today is being broadcast live on the Internet. Anyone can listen to the call by visiting the homepage of our website and clicking the webcast link of the conference call. In addition to analysts and investors, financial media have been invited to listen to today’s conference call, and a replay of the webcast will be available on our website later today. Before we begin to comment, we would like to remind everyone that today’s press release and some of our comments on the conference call contain forward-looking statements and actual results may differ materially. I hope you can refer to the warning language contained in our press releases and presentation materials, as well as the risk factors described in our annual report on Form 10-K. The person speaking with me today is our Chairman and CEO Richard Adkerson. We have Mark Johnson, who is in charge of our Indonesia business; Josh Olmsted, who is in charge of our American business; Mike Kendrick, who leads our molybdenum business; Steve Higgins, who leads our business activities and is also our chief administrative officer; and Rick Coleman , He leads our project development activities. I will first summarize our financial performance briefly. We will complete our slides and some prepared comments, and then we will answer your questions. Today, we reported a net profit attributable to common stock of US$718 million in the first quarter of 2021, or US$0.48 per share.

After adjusting for a total of US$38 million or US$0.03 per share in net expenses, the adjusted net income is US$756 million or US$0.51 per share. For details of these non-recurring net expenses, see the press release of Roman Numeral VI. We reported adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA for the quarter of $2.04 billion, and we adjusted our EBITDA calculations on page 36 of the slide. In the first quarter of 2021, our copper sales were 825 million pounds, which is close to our estimate. Our gold production in the first quarter of 2021 is in line with our January estimate. However, we postponed certain shipments from Indonesia to the second quarter, which caused a time difference in our gold sales. In the first quarter, we benefited from improved pricing. Our average realized copper price in the first quarter was US$3.94 per pound, which was significantly higher than the same period last year. Our gold price of $17.13 per ounce is also higher than the realized price a year ago.

We will continue to focus on maintaining a low-cost position. In the first quarter, the combined average unit net cost of our copper mine averaged US$1.39 per pound of copper. We generated a total of US$1.1 billion in strong operating cash flow, after deducting US$300 million in the use of working capital. Cash flow has exceeded the total capital expenditure of US$370 million in the quarter. As you can see, our board of directors passed a new financial policy in February that is consistent with our strategic goals of maintaining a strong balance sheet, increasing shareholder cash returns, and driving future growth opportunities. At the end of the quarter, we were financially sound, with consolidated cash of US$4.6 billion, debt of US$9.8 billion, and our net debt-our debt (net of cash) at the end of March was US$5.2 billion.

Richard, I want to transfer the call to you, and we will begin to review the slide material on our website.

Richard C. Adkerson - Chairman and Chief Executive Officer

Thanks, Catherine. I am very happy to be able to review our performance in the first quarter with you, especially the exciting progress we have made in the past year, when we were all faced with such uncertainty. In Freeport, this is a special and vibrant time. Our team is working safely. We remain vigilant against COVID because we have successfully executed our operational plan and we are now working on projects for future growth. Our Grasberg underground ramp is proceeding as planned, which is the key to our strategy. With our newly commissioned Lone Star mine, the first quarter begins-our Chino mine in New Mexico has restarted, and the mine rate of our flagship mine, Morenci in the United States, has increased, and U.S. production is increasing the largest in North America, one year We can reduce production there to save cash. In South America, we are working to restore production levels to pre-pandemic levels, and we will achieve this goal in the next 12 months. The Cerro Verde team in Peru and our El Abra team in Chile have done a great job in solving these problems. Like all companies, we focus on sustainable development plans. This has always been the key to Freeport's management operations. We are beginning to use the new Copper Mark to certify each of our businesses. The copper standard is an industry framework recently formulated by the International Copper Association to ensure responsible production in line with the United Nations Sustainable Development Goals. So far, our six businesses have now been certified and are in a leading position in the industry, and we are working hard to obtain all certifications. Go to the slides, I only have a few slides to review with you. On Slide 3, we released our annual sustainability report, which can now be found on our website.

This is the 20th year we have reported on sustainable development. We are working hard to make it better. I encourage all of you-each of you to read it. We are proud of our outstanding work in sustainable development and continue to commit to continuous improvement. In the past few years, we have released this report to annual shareholders at the annual general meeting. Let's move it up. We have added new resources to our Freeport team to deal with sustainability issues. I congratulate this team for their efforts to get this report to be released sooner now so that we can facilitate our expanded contacts with a wide range of supporters who are now focusing on our sustainability performance and initiatives. Last year, we released a preliminary report on climate. Our 2021 report will be released soon. We recently released our annual report to shareholders, and I think this is a great theme, which is to move forward courageously, responsibly, reliably and relentlessly. This theme describes our current position in Freeport. As a leading and evolving global copper producer, we are determined to succeed and operate responsibly, and the tradition of Freeport will persist in the execution of our strategy. Slide 4. Our output in the first quarter is in line with our target. We increased our copper sales guidance for 2021 by 3.85 billion pounds and increased our sales in 2022 to 4.4 billion pounds. The Grasberg rise I mentioned earlier continues to make progress in a very good way.

We have now achieved the 75% annualized target long-term metal production operation rate. We are expected to reach 90% in the third quarter and reach full price by the end of the year. After so many years of hard work, reporting this progress is simply a highlight of my career. However, the credit goes to our field team in Indonesia, supported by our global team of technical experts. This is a historic achievement of our transformation-because we are completing the transformation of the Grasberg open-pit mine into this large-scale underground operation. American companies are progressing well. We are achieving production and cost targets. Now we are actively watching and working on future growth opportunities, generating strong cash flow, and improving our balance sheet. In the past 12 months, by the end of the first quarter, net debt was reduced by more than $3 billion to $5.2 billion. But during this period, copper prices averaged $3.13. It is now over $4.25. Many people predict that prices will rise in the near future. Our near-term outlook for copper and gold sales is much higher. Our recent performance, as a result of the decline in commodity prices and the decline in production, has significantly reduced debt, which proves our company's current strength in generating cash flow. Our strong performance and optimistic outlook for our business and products enable our board of directors to adopt new financial policies, which will provide shareholders with increasing returns in cash, while providing flexibility for growth and building very strong assets Balance Sheet. We also added two new directors: David Abney, the retired chairman and CEO of UPS, with a huge global supply chain business; BP retired CEO Bob Dudley (Bob Dudley) has joined our board of directors, BP is a long-term leader in the global extractive industry. Each of these people has a wealth of knowledge and experience in the global market and the problems we face when managing our business. Bob and David have many opportunities to join other boards. Their decision to join our board of directors is personally gratified and appreciated.

They are very keen to work with Freeport’s other directors and our management team, and responsibly create value for our stakeholders. Go to slide 5. Countries around the world are responding to COVID through proactive fiscal and monetary policies. This is an important factor in the recent demand for copper, extending beyond China. For the past two decades, China has been the driving force behind copper demand growth. New sources of demand are now expanding. In addition to China’s continued strong copper consumption, increased copper consumption in developed countries that have adopted COVID recovery measures, and global growth driving the increasingly important demand in emerging markets, copper now has global carbon reduction, infrastructure and extensive expansion technologies, 5G , Artificial intelligence and data analysis all need more copper. Importantly, copper is essential for the transition to a global clean energy future. Approximately 70% of copper is used to transmit electricity. With the implementation of the Clean Energy Program, the copper density in the economy has expanded significantly. The outlook for copper has never been better. Slide 6. Significant demand growth is inevitable. Meeting this increased supply faces severe challenges. This will require meaningfully higher prices to support mine investment. The combined effect of rising demand and scarcity of new supply indicates that a huge structural deficit is about to appear, supporting copper prices much higher than previously expected. I believe you have noticed this in the recent forecasts of mining industry analysts. Freeport is particularly capable of benefiting from these fundamentals. It is a leading and responsible large-scale copper producer, and our portfolio has embedded near-term and long-term growth.

The scarcity value of a portfolio like ours is unique. It is very valuable now, and with the emergence of large market deficits, it will become even more valuable. Slide seven highlights our recent growth. By 2021, copper sales are expected to be 20% higher than 2020, and gold sales will be 50% higher than 2020-55% higher than 2020. It is expected that the sales of copper and gold in 2020 will further increase in the range of 15% to 20%. Gold. The capital and execution risks to achieve these recent higher transaction volumes have lagged behind us to a large extent. Increasing production at a lower incremental cost will produce a greater profit margin. With the price of copper ranging from US$4 to US$5, we will generate more than US$12 billion to US$17 billion in annual EBITDA in 2022 and 2023. This is a big number. The eighth page describes the new financial policy adopted-our board adopted earlier this year. It aims first to support a strong balance sheet, increase shareholder returns, and fund our future investments. As I just outlined, the current copper market and its favorable prospects are providing substantial cash flow to achieve these goals. Our board of directors approved a basic dividend of $0.30 per share per year. Our first quarterly dividend will be paid in May-as we resume the dividend, after reaching a target net debt of $3 billion to $4 billion, it will be achieved by the end of the year at today's price.

The policy of our board of directors establishes a performance-based payment framework to provide shareholders with additional cash returns through dividends and potential share repurchases. Shareholder returns will depend on the allocation of up to 50% of the available cash flow to shareholder returns. The remaining balance can be used for future growth and may further reduce debt to between US$3 billion and US$4 billion below our target. Our board of directors will evaluate additional expenditures at least once a year. Given the current level of copper prices and the prospects for copper and gold prices, the above figures show that shareholders who have a lot of financial resources available for future growth investments can get a lot of cash returns. Slide 9 describes some of these growth investments. There are many options in our product portfolio. We resumed work that was suspended a year ago due to COVID to assess the timing and activation of these opportunities. In the United States, we are considering expansion in Lone Star and Bagdad and evaluating opportunities to increase production through leaching recovery technology. This is really exciting. The Lone Star mine is our newest mine. It is adjacent to our existing business in southeastern Arizona, which dates back to the 1800s.

There, we have strong community support. We have a good relationship with Native American groups. We are evaluating the expansion of Lone Star's oxide ore, we are now in production and are growing in terms of ore availability. But it is important that we are also carrying out these longer-term development plans in this historic mining area, which appears to be a potential world-class sulfide resource. In Baghdad, northwestern Arizona, we have the opportunity to build a new beneficiation plant to double the output. We have a long reserve life there. In addition, there we have strong community support. I have always emphasized this point because it is a challenge for new supply development around the world. We focus on technologies that reduce the capital intensity of these projects. The leaching technology program provides numerous opportunities in this area that can increase the value of the entire product portfolio. We are continuing to evaluate the attractive and potentially significant expansion of the Chilean El Abra mine that we are partnering with CODELCO. Compared with our American project, this project requires larger investment and longer delivery time. The resources are attractive and very large. This means that El Abra may undergo major expansion in the future. We are evaluating the development of the new PT-FI deposit in Papua, Indonesia, which is an undeveloped deposit. Call a bitter liar. This copper-gold project involves a large cave mine, using the extensive infrastructure that Grasberg already has. It will benefit from our expertise and long-term success record in block collapse. We also-it's interesting when evaluating a series of interesting investments in projects that support our carbon reduction and other sustainability goals. This involves the idea of ​​developing new energy power generation.

For our operations and nearby communities, it is clean and renewable. We are advancing an exciting project plan for Atlantic Copper and Spain to recover valuable metals by recycling electronic equipment, which is also a good thing from a sustainability perspective. Now we have these opportunities. We will comply with discipline by making new investments, being selective and measuring in capital deployment, and focusing on value-added investments. Because we have such a long reserve and established operating licenses, we will be effective communities with new investments. Slide 10 o'clock to this alternate position. Our reserve life is more than 30 years. Now this is proved and possible economically recoverable reserves. In addition, we have identified more than 100 billion pounds of copper from metal resources other than reserves, which are part of our existing business. We will work hard to incorporate these into future reserves increase and mine factories. For our industry, developing supplies to meet the rapidly increasing demand for copper has become increasingly challenging and costly. Our team really likes the location of our Freeport in this environment. Slide 11.

We have strong operating franchises in the United States, South America and Indonesia. In all these places, we have won the trust and respect of our partners, customers, suppliers, financial markets, and most importantly, the worker communities in the countries where we operate. We have significant developments in large-scale operations expertise-development and large-scale operations expertise. We now have the ability to undertake new projects anywhere in the world in a responsible and efficient manner, regardless of the ore or the situation. I want to end it by getting to know the people in Freeports around the world. Their commitment and dedication are impressive. In the past year, the achievements of COVID-19 are really special. Against the background of all the challenges that our team has faced and overcome over the years, I am very proud of this team. On the basis of these achievements, the future is brighter and brighter, and Freeport is advancing responsibly, reliably and tirelessly.

Kathleen will review the financial results with you.

Kathleen Lynne Quirk - President and Chief Financial Officer

Thank you, Richard, I will make some brief comments on our financial and operational affairs, and then we can answer your questions. Starting from slide 14, we provide some additional details about our business activities. You can see that in the United States, the Lone Star mine is operating well. We see an opportunity to continue to increase our stockpile rate there and fill the tank house with an annual capacity of 285 million pounds. With the continued success in increasing the mining and accumulation rate, we will have the opportunity to make a relatively low incremental investment and increase the production of Lone Star oxide much higher than the original design. We restarted Chino at a rate of 50% in the first quarter. As we achieve the efficiency of the target, we may have the opportunity to further improve. At Morenci, we increased the mining rate by approximately 10%. This was previously planned for 2022, but we are accelerating this process. Compared with the previous plan, this will allow us to increase production in 2022 and prepare us to increase production over time. In South America, the team was able to achieve higher rates compared to our plan. Due to operating restrictions in Peru, we think it is wise to maintain our plan at a grinding rate of 360,000 tons per day this year, and we expect to increase it to the level of 400,000 tons per day in the next 12 months as the COVID restriction is lifted. At El Abra, we have made great progress in increasing operating rates to provide more copper in 2022. As Richard said, at Grasberg, we made excellent progress in the first quarter and continued to implement the increase in production plan to achieve our target metal operating rate at the end of the year. We had more inventory at the end of the first quarter than originally expected, and these sales will be recorded in the second quarter. You will notice from the detailed timetable in the reference that we have made some minor changes to the sorting of Grasberg Block Cave and Deep MLZ mines.

The net impact of these is not important to our metal production, and the outlook is similar to the previous plan. We are very encouraged by the scale of the upgrade of Grasberg Block Cave and Deep MLZ. We will add a second crusher at Grasberg Block Cave this quarter, which will allow us to continue to increase interest rates there. In the next slide, we provide the latest information on plans to develop new smelter capacity in Indonesia to fulfill our commitment to the government. We are expanding our existing smelting plant with PT Smelting's Japanese partners. This can be done on a relatively low-cost basis and will reduce the annual capacity required for the new smelter to 1.7 million tons. The cost of PT Smelting is approximately US$250 million. PT-FI will fund these costs through ongoing bank financing. As you have read, we have been discussing balance requirements with a third party, according to which the party will build a new smelter under a structure similar to the one we developed for the existing smelter of PT Smelting in the 1990s. So far, the two sides have conducted extensive negotiations, but we have not yet reached acceptable commercial terms. During this period, we will continue to plan the green space project in East Java. As we show in the picture on the right, you will see the long-term costs and the economics of smelter financing. We plan to use debt financing to phase out 5% of exports to offset our current tariffs. Therefore, the economic impact on PT-FI is not significant.

On the slide-in the next slide, slide 16, we provide a three-year outlook for the amount of copper, gold, and molybdenum. We will increase copper sales in 2021 to 3.85 billion pounds from a previous estimate of just over 3.8 billion pounds. We increased our 2022 copper production guidance by 100 million pounds to 4.4 billion pounds, which reflects the incremental growth in the United States. The remaining sales forecasts remain basically unchanged. As Richard mentioned, while we are making long-term development plans, we will continue to evaluate additional near-term incremental growth opportunities. We have outlined our estimated annual unit net cash cost in Slide 17. You will notice that compared to the previous estimate of US$1.25 per pound, we have updated our estimate to an average net unit cash cost of US$1.33 per pound of copper. A large part of this increase is related to higher royalties, tariffs and profit sharing, which is related to the change in the price assumption of copper from US$3.50 per pound to US$4 per pound. We have also added cost estimates to reflect rising energy costs, mainly oil-related costs, and our forecast is now about 25% higher. Our team continues to do a good job of effectively managing costs. We have seen some growth, but not significant. Our team continues to find creative ways to maintain a low-cost position. On Slide 18, we used our quantity and cost estimates to show the importance of cash flow generation. We offer sensitivity ranging from US$4 to US$5 per pound of copper. We flatten gold at US$1,750 per ounce and molybdenum at US$11 per pound. Increasing sales at a lower incremental cost will generate very substantial EBITDA. You can see here that from 2022 and 2023 an average of more than 12.5 billion U.S. dollars per year (4 U.S. dollars in copper prices) to 17 billion U.S. dollars per year (5 U.S. dollars in copper prices). Under these price scenarios, operating cash flows range from nearly US$9 billion to US$12 billion.

These cash flows are much higher than our planned capital expenditures, providing a large amount of free cash flow as we move forward. On Slide 19, we showed our capital project forecast, and we showed that the estimated capital in 2021 is USD 2.3 billion, which includes potential expenditures for the Indonesian smelter, which will again be financed through debt. But these-the guidance figures for 2021 are very similar to the figures in our previous report. Our combined capital in 2022 is US$2.2 billion, which is approximately US$200 million higher than our previous forecast, which includes accelerated mining investment to increase production and provide capacity guarantees for our plans. We have entered-we are in a strong financial position and have entered a period of abnormal free cash flow generation. Slide 20 shows you the extraordinary cash flow we generate in our business. You can see in the slide that our cash balance has increased by more than $2 billion in 6 months. Our long-term asset base, growing production conditions, and strong market enable us to continue to strengthen our balance sheet, provide cash returns to shareholders, and create additional value for our asset base. Our financial policy that Richard talked about earlier is designed to check all these boxes, and we look forward to implementing these plans. Finally, I just want to say, echoing what Richard said, this is an exciting time for Freeport. We have the right assets at the right time, and we will continue to focus on continuing our momentum.

Now operator, I want to start asking questions.

[Operator Instructions] Our first question comes from Emily Chieng of Goldman Sachs. please continue.

Emily Chieng-Goldman Sachs-Analyst

Good morning, Richard and Catherine. Thanks for the update today. It's just a question about capital allocation policy. I am grateful that you updated this a few months ago. But suddenly, the hypothetical current copper price is about to show a lot of cash return potential. But maybe on the other hand, can you discuss how you think about when is the right time to approve growth? You can offer any color on long-term or sustainable copper prices, do you need to see in your hypothesis or need the basic situation​​? Then you mentioned discipline and selectivity, but when you look to the next few years, when will you start thinking about triggering growth?

Richard C. Adkerson - Chairman and Chief Executive Officer

So Emily, we are-we suspended all our research on growth projects a year ago. We have now resumed these analyses in order to understand the advantages and disadvantages of each project and evaluate them. We expect this basic valuation work will continue at least until the end of this year. By the end of this year, we hope to have a clear path forward. Therefore, it will take some time to actually start a large amount of capital expenditure. At the same time, we pointed out all the sales growth brought by Grasberg, the resumption of COVID operations, etc. Therefore, we will increase production with strong prices and high cash flow, and the funds spent are limited because we will not be ready to approve the project as you said. We do not have any specific target copper prices. We have been studying the situation of different prices-how new projects fit our investment portfolio. We hope to use these resources that we have and how to adapt them to all our existing investment portfolios for risk management. Therefore, we will not look at it too much on a project-by-project basis, but how it fits into our project.

Freeport really benefits from the fact that we operate all the projects we are interested in. Therefore, this allows us to deal with these issues on a consistent company strategy basis rather than on a project-by-project basis. Of course, at these price levels, our project is economical. Now you know that prices may go up a lot. So I expect that over time, we will spend money on capital, which will not happen in the short term. This will become a feature of the entire industry, because even if we decide to spend money, the time frame for developing a project is many years, at least six to eight years. So all of this will be, as you know, Emily, because you have been writing about it, which will be very supportive of copper prices. You cannot open the valve quickly to add a new mine supply. When you cannot do this and the quantity and demand increase, it translates to higher prices.

Emily Chieng-Goldman Sachs-Analyst

understood. This is a very useful color. A quick one, if I can squeeze in. Only the operation update of Grasberg Block Cave and Deep MLZ. It seems that sales may move slightly by a quarter. However, you can provide any information about the sustainability of the bronze grades we have seen, any comments on slope profiles that can speed up drilling, please ring the alarm bell there? Thank you.

Kathleen Lynne Quirk - President and Chief Financial Officer

We let Mark Johnson-Mark, you just want to provide the latest news about...

Mark J. Johnson - President of Freeport-McMoRan Indonesia

Yes. We are generally planning. From the model to what we saw in the factory, the grades are well tracked. In fact, we are lucky that the grade of the factory is actually higher, and the mine has been recorded as pending. Drawbell opens, and it is likely to show in the slide that we did make some adjustments in Deep MLZ. We slowed down the advancement of some diorite-type caves, which are more challenging rocks, and accelerated the advancement of the caves. Some scars disappeared westward in PB2. In GBC, we have added-to speed up the opening of our bells. In five years, it is relatively the same.

Emily Chieng-Goldman Sachs-Analyst

great. This helps. Thank you.

Richard C. Adkerson - Chairman and Chief Executive Officer

In fact, we mentioned delays in shipments, which have nothing to do with operations. Inventory is on site. The government has loading, transportation and some administrative problems. Therefore, all inventory produced on site will now be sold. With the increase in inventory, we were able to advance some maintenance activities from the second quarter to the first quarter, all of which are to support our future plans.

Our next question comes from the collaboration between Chris LaFemina and Jefferies.

Chris LaFemina - Jefferies - Analyst

Hi. Thank you for answering my question. Good morning. It’s just a question about this-Richard, the question is about the performance of South America. It's nice to see that you are running well there, despite the COVID escalation. But we also have some political risks that may escalate there, especially in Peru, where the presidential runoff will be held. Therefore, the first question is related to the contracts and licenses you have in Peru. If the government tries to substantially increase taxes or try to nationalize mines, is this similar to your situation in Indonesia, where you signed a stabilization agreement with the international arbitration clause? That is-do you have the same protection there?

Richard C. Adkerson - Chairman and Chief Executive Officer

Yes, we-yes, the answer is yes. We-Stability Agreement has been a feature of Cerro Verde's operations since Freeport, but as we expand our business, we are able to obtain new Stability Agreements. As the price of copper rises, the desire of government workers for more funds is the same-but copper is very important to Peru, because Peru still faces challenges such as poverty. So we just step back and observe the political environment. We know that we must cooperate with any government anywhere in the world that a country chooses, but we do have a strong right to do so. Unlike some businesses in Peru, due to our social investments in water and wastewater projects, we have established positive relationships with local communities. So our team is just-I mean, I can't tell you how great their work is. A year ago, we were really worried about Peru. Our workers live in Arequipa. There are indeed problems with community communication, but we have worked with the community to develop temporary shelters and increase our rates to be close to our initial operating rate targets. As we develop, we can expand further. The team there just did a great job.

Chris LaFemina - Jefferies - Analyst

So glad to hear. Thank you.

Kathleen Lynne Quirk - President and Chief Financial Officer

Just under the stabilization agreement, we do-our taxes are fixed in the agreement, and they are actually higher than the current legal tax rate in Peru. So we paid a higher price to gain stability. We have also contributed a lot to the community and big employers. We have a profit sharing mechanism there. This is part of the reason why you are seeing increased costs. So we do this-as the profit of the mine becomes more profitable as the price rises, a large amount of the profit is shared with the employees, partly by the employees, and partly by the country. Therefore, sharing the economy with local communities and countries and sharing workers with investors is a good model.

Chris LaFemina - Jefferies - Analyst

great. Regarding El Abra's potential expansion, we heard about the challenge of obtaining permits from other Chilean miners. In some cases, licensing seems almost impossible. I think if the company cannot achieve production capacity online in Chile, this is very optimistic for the copper market. But I just want to know what licensing barriers you might need to actually spend the asset in terms of El Abra? Thank you.

Kathleen Lynne Quirk - President and Chief Financial Officer

We will submit an environmental impact statement related to the project. So this is a very comprehensive licensing process. We have experienced it before, we have to do a lot of baseline work, etc. Therefore, you need to do a lot of work before actually submitting it. But the project part is-the licensing part is why Richard said six to eight years.

Chris LaFemina - Jefferies - Analyst

Richard C. Adkerson - Chairman and Chief Executive Officer

In the best environment, Chris, it takes a long time to get a license. Now we don't have some-because where this mine is located, and it is a long-running existing business, it is close to the CODELCO mine. It has no other licensing issues. Large-scale plant expansion will require a desalination plant and the cost of transporting water to the high altitude areas where we operate. But this is in an environment where we are not faced with space challenges, but that's it, it takes a long time, and it's a big project.

Chris LaFemina - Jefferies - Analyst

Our next question comes from Alex Hacking from Citi.

Alex Hacking-Citi-Analyst

Hi, Richard. Are you OK? Good morning. Just follow up Chris' question about Peru. I'm not sure how much you can answer here, but is there any contact between the mining industry and the candidates, especially those leading in the polls? Secondly, regarding your production footprint, with the return of Chino and the full recovery of Cerro Verde, will this return Freeport's production footprint to the normalized pre-COVID level? Or do these prices have potential for future upsides? thanks.

Kathleen Lynne Quirk - President and Chief Financial Officer

I will take the second one first. As far as the slope backup is concerned, we have decided to start the backup of El Abra, which is in progress. We hope to return to pre-COVID levels in 2022, and this is reflected in our guidance. Same as Cerro Verde. In the United States, we have drastically reduced the mining rate. We started to increase these backups. We have some opportunities, and there are still some opportunities in Morenci that have not been included in our forecasts. Then we have a chance at Chino, because our current plan is to run Chino at 50%. In addition, as we mentioned, we have some potential incremental opportunities in Lone Star. So I want to say that in the United States, we do have some opportunities that are not in our short-term plans. We will evaluate these opportunities and some of the leaching technology applications that Richard mentioned earlier. So we do have some short-term opportunities that are not in our plans, but...

Richard C. Adkerson - Chairman and Chief Executive Officer

Catherine, let's ask Josh to make a short comment on this. Josh Olmsted was appointed as our chief operating officer in the Americas last year. For many years, he has been the second-ranked person. He is a young man, but he has a long career in Freeport and has done a great job of bringing vitality and leadership to our team. So Josh, make a few comments.

Joshua Frederick Olmsted - President and Chief Operating Officer, Americas

Thanks, Richard. As Catherine said, we have some near-term opportunities in Morense, Lone Star, and Incremental Things. I think the most exciting part is our work on the leaching technology involved in both Richard and Kathleen. If we can prove some of the concepts that we have identified and begun to research, it may have a significant impact on our ability to utilize our existing long-term inventory, which we have not yet been able to extract. Therefore, this leaching technology is really meaningful, because we are looking for opportunities to obtain some incremental low-cost incremental copper as we move forward. So our plan is working hard this year. The goal is to be very similar to Richard’s comments on larger-scale projects, to have a clearer understanding of what it looks like and its potential value to us before the end of the year. But we’re not aware of what we’ve seen so far. I am very excited.

Richard C. Adkerson - Chairman and Chief Executive Officer

So, restart, technology, leaching all these show that the output of our traditional business is increasing, Chris-Alex, yes, we are with Alex now. So Alex is in Peru, man, how complicated politics is all over the world. In Peru, when they are close to this runoff, more than 1/2 of your candidates get 10% positive or negative support in the polls, so this is very complicated. Freeport is far away from politics. As I said, we don't-we just run our business, support the community, and are ready to work with anyone who appears in the political process. The mining industry in Peru is-there is an active mining association led by Peruvians who contact candidates to understand the policies that affect mining and interact and communicate with them. I believe they will cooperate with these two candidates as we move forward. You will notice this candidate. He was very active when talking about mining before and is now commenting on the importance of mining to Peru. So all of these will work, we just need to see what happens.

Alex Hacking-Citi-Analyst

Your next question comes from Timna Tanners of Bank of America.

Timna Tanners-Bank of America-Analyst

Hi. Good morning. Thank you for asking the question I want to ask-here, I want to ask more questions about cost. Obviously, you detailed what caused the incremental costs in the quarter and guidance. But how-obviously, costs are rising, and inflation is a big topic. I mean, do you think this includes future costs that you can fully bear? Or do you see more pressure? Can you elaborate on where this might come from and what you see in more detail?

Richard C. Adkerson - Chairman and Chief Executive Officer

So the first point I want to make is one that Kathleen mentioned earlier. Some important elements of our cost are related to copper prices. They are related. I mean things like royalties, profit-sharing plans, general labor costs, and so on. There is a correlation between them. Then there are other related input costs. Energy costs are an important part of costs, and energy costs have risen in recent months. Thankfully, copper prices have risen even more, but energy costs have been factored in. Then certain other costs will inflate. So far, energy costs are costs in addition to profit sharing. Royalty fees are the most influential fees. As time goes by and the price of copper rises, we will have to deal with inflation. But we have such a strong profit margin, we have a great supply team team that can work with our suppliers to offset costs as much as possible. We are actively working to achieve this. So Timner, I think - I mean, I know you realize this because you are right, but inflation is good for copper. I mean that inflation is good for copper. All these expenditures that the world is doing today are used for COVID recovery, and expenditures around the world are driven to deal with economic inequality, which pushes money to people who consume to create economic speed, thus creating demand for copper. Therefore, in a broader sense, all these forces will benefit our company.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. The interesting thing is that what you see today is $4.25 copper. Last time the price of copper was US$4.25, while the price of oil was not US$60. It may be 110 dollars per barrel. Therefore, we are benefiting from lower energy prices. Although they have proposed some, the historical relevance is not as relevant as before. We review our position in the supply chain every quarter and revise our forecasts every quarter to reflect current pricing and similar things. So this has been integrated into these plans. As Richard said, whether we will face additional cost pressure due to the freight market or other supply tightening, we have to see what will happen, but now we are making forecasts based on our current pricing contracts.

Timna Tanners-Bank of America-Analyst

This is a high-quality question, but if we assume that copper prices are higher, for example, should we still consider some inflation assumptions?

Richard C. Adkerson - Chairman and Chief Executive Officer

Well, as I said, yes. The answer is yes. There is relevance. I mean, royalties rise, profit sharing rises, and then you make judgments about energy, steel costs, etc., but—I know I broke the record, Timna. I know you understand, but the bottom line is rising profit margins. For many companies, these changes in inflation have reduced profitability. Historically, with the rise in copper prices and other costs, our profit margins have been very strong.

Timna Tanners-Bank of America-Analyst

Now it's certain, it's very clear. Thank you.

Richard C. Adkerson - Chairman and Chief Executive Officer

Your next question comes from Matthew Murphy from Barclays Bank.

Matthew Murphy-Barclays-Analyst

Hi. I have a question about a smelter in Indonesia and would like to know if you can help me understand the risks of the project schedule. So you disclosed information about fines in your 10-K, and there are some comments in the media. I just want to know what you are expecting. Through this discussion and viewing options, is it possible for you to see more fines or more dissatisfaction from the Indonesian government? Or do you think it will go in the opposite direction and it will be resolved?

Richard C. Adkerson - Chairman and Chief Executive Officer

I want Catherine to talk about it. She is performing-working more actively with the parties there and negotiating terms. We will cooperate with the government. We made a commitment to build a smelter on December 18. I won't—I know very well that we acknowledge this promise, and we are ready to honor it. There are different opinions within the Indonesian government. When you refer to the government, you can interpret it as a group. There are different opinions within the government as to whether to support this development. We will obey or continue the Gresik project we initially initiated. Therefore, we are working closely with our partners and shareholders MIND ID, the Ministry of State-Owned Enterprises, the Ministry of Energy and Minerals to find the best-the decision made by the government, and we are "ready to move on, as long as we have-if We are moving in this direction. We debate - we have reasonable terms and a reasonable regulatory environment. So Catherine, why don't you talk about this, and then the Ministry of Mines wants to push us. I believe we will solve this situation and everything will be It's alright. But Catherine, why don't you give some...

Kathleen Lynne Quirk - President and Chief Financial Officer

OK. According to regulations, the government issues export licenses every year. Then there is a 6-month inspection to assess your progress against the smelter development plan that they own and have approved. As we said in 2020, due to COVID, we notified the government that our schedule was affected by the pandemic, and there was a force majeure situation that prevented us from completing the schedule. According to the regulations, if you do not meet the timetable, you may be fined. This is what the government did, and they levied this fine. We have gone in and explained to them the reason for the project delay. This is force majeure and any fines can be exempted according to regulations. So we are discussing with the government. They asked for some additional support for our position and details. I mean, it's clear that this kind of COVID has affected the schedules of projects around the world, but they asked for more details. We believe that it will be resolved in a manner that is satisfactory to both parties.

But as Richard said, we are also very focused on finally fulfilling our promise to the government. We informed them that we have a 12-month delay-due to COVID, the deadline for the construction of a new smelter on December 23 is reached, and now we don't expect it to be completed until 2024. This option Richard is referring to is that our debate may keep us going as planned. We just need to make sure it complies-from a business perspective and the overall business risk perspective. But we are working closely with the government. I can say that our interests are our partner, MIND ID, and our interests are very consistent. In terms of what we need to do, we are all on the same page. We are just trying to solve this problem in accordance with government regulations, and I believe we will.

Matthew Murphy-Barclays-Analyst

Catherine, will the result of the discussion with the government complete the schedule for the new smelter that gave you the contract?

Kathleen Lynne Quirk - President and Chief Financial Officer

right. This is part of the new timetable for the project we are discussing. This is related to our discussion with them on this administrative fine.

Matthew Murphy-Barclays-Analyst

Your next question comes from the collaboration between Carlos De Alba and Morgan Stanley.

Carlos De Alba - Morgan Stanley - Analyst

Good morning, Richard and Catherine. Good morning. Just follow up with the smelter. Could you please give us a detailed account of the negotiations between the commercial parties, perhaps to allow a third party to invest in the main smelter? Those are still in progress or have stopped, we should come back now to think more about what PTI is doing-PT-FI handles this problem on its own? Then there is capital expenditure, which is not a big increase, but the 2022 capital expenditure outlook related to other projects will increase by about 200 million US dollars. Is there anything to emphasize specifically? Or is it just based on a series of projects that you elaborated on in the conference call?

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Well, on the last question...

Richard C. Adkerson - Chairman and Chief Executive Officer

Let me talk about the last question, this is good news, Carlos. Higher copper prices give you an incentive to spend money to increase value. Therefore, these projects are mainly in our long-term plan, and we are advancing to create value. Right, Catherine?

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Yes. Completely correct. We put up some capital. We also increased production. So that's it. This is basically an investment in mining equipment. The first part is the negotiation. We will not comment publicly on the details of the negotiation while the negotiation is still in progress, but we all set a goal to try to complete the commercial agreement with a third party by the end of March. Therefore, extensive negotiations were conducted back and forth in the first quarter. By the end of March, we had not reached an acceptable agreement. We have been working on another project in parallel. At some point, we must make a decision. We have not finalized that decision yet. But we are advancing our own greenfield projects so that we can fulfill our obligations to the government instead of just relying on third parties. So at this point, we are still having some discussions with third parties, but we are also advancing another one at the same time. Therefore, once we make the final decision, trust me, we all hope to make a decision as soon as possible, and we will communicate it to you.

Carlos De Alba - Morgan Stanley - Analyst

This is clear. I admire this color. Thank you very much, Richard and Catherine.

Richard C. Adkerson - Chairman and Chief Executive Officer

Carlos, this is—when we talked there, we said—I'm listening to Catherine, some of the strangest decisions the government has made. We are PT-FI in Indonesia, which is a partner between MIND ID and FCX. FCX operates, but we cooperate with the Ministry of State-Owned Enterprises in Indonesia. This is a different world, unlike those who have followed us during those years when FCX ​​had to take the lead in dealing with the government. In fact, I personally participated in these negotiations. Now we are there very much like a team. As Catherine said, it is consistent, and its environment is much better than in our history.

Your next question comes from the partnership between Orest Wowkodaw and Scotiabank.

Orest Wowkodaw - Scotiabank - Analyst

Hi. Good morning. Follow up with the smelter again. At some point, I assume that you will have to decide whether to build your own or work with a third party. Is there-at this point, in which direction, has the date dropped? I mean, of course, you can't delay forever.

Richard C. Adkerson - Chairman and Chief Executive Officer

No, it's the government. I mean, this is really-the government will make this decision. We are ready-if we can get it-if the government supports it and we can reach a reasonable deal on the terms of sale of concentrates in a regulatory environment that handles our IUPK obligations, and PT-FI is ready to deal with Weda Bay. If that does not happen, we are ready to proceed with another project, and we are working on it. We are not sitting here and doing nothing. We are ready to move on. I just think it is important to remember that although this is a big project and a management issue, it is not a huge financial issue for FCX. I mean, we paid a 5% export duty, which the smelter can exempt. The financial impact is not that important. More than 70% of the financial impact is vested in the government through taxes and equity. so...

Kathleen Lynne Quirk - President and Chief Financial Officer

But Orest, we really want to make a decision sooner. There is no certain deadline, but we hope to make this decision soon.

Orest Wowkodaw - Scotiabank - Analyst

Yes. OK. Thank you. It's just-what I'm talking about is follow-up. Go ahead, Richard.

Richard C. Adkerson - Chairman and Chief Executive Officer

No, I just said that this is not what we can say, we want to do this, we want to-this must be a joint decision between the government and PT-FI.

Orest Wowkodaw - Scotiabank - Analyst

I see. OK. Assuming fairness-I mean, given that the current copper benchmark or spot TC is so low that in order to get a third party to agree to build a smelter-suppose they are looking for fairness for some kind of stability in TC, maybe at a higher level level?

Richard C. Adkerson - Chairman and Chief Executive Officer

Kathleen Lynne Quirk - President and Chief Financial Officer

Orest Wowkodaw - Scotiabank - Analyst

Richard C. Adkerson - Chairman and Chief Executive Officer

Orest Wowkodaw - Scotiabank - Analyst

OK. Just to clarify, did I hear that you said that you hope to provide the market with guidance on some brownfield growth opportunities in the United States before the end of the year? Is that correct?

Richard C. Adkerson - Chairman and Chief Executive Officer

That is our hope. This is our wish. I mean, as you know, we are a very transparent company. We hope we can get some clear information before the end of the year. Josh mentioned it. Catherine mentioned it. As we have done, we will keep everyone updated on the situation.

Orest Wowkodaw - Scotiabank - Analyst

great. thank you very much.

Your next question comes from the very independent research of John Tumazos and John Tumazos.

Richard C. Adkerson - Chairman and Chief Executive Officer

John Tummazos-very independent research by John Tummazos-analyst

thank you very much. Good morning. Thank you for answering my call. Congratulations to all-money is raining on you. Just follow up Emily’s first question. For the Baghdad factory project, the El Abra factory project and the Kucing Liar underground project, we know that you will carefully design and research during planning, permitting, construction and financing. Can you say with certainty that each project is likely to come in 2025 or later NS?

Richard C. Adkerson - Chairman and Chief Executive Officer

John Tummazos-very independent research by John Tummazos-analyst

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Baghdad may come faster than the other two. You know that the investment lead time of Kuala Lumpur and Kucing Liar is very long. This is our long-term plan. We are just optimizing it now. Therefore, the funds will take a long time. Then, only from a ranking point of view, El Abra will lag behind Baghdad in the time period it can go online. So you are talking about-if you start everything, now, you are talking about all licensing procedures for seven years, seven years, eight years, all licensing procedures. But if we—depending on when we start, Baghdad may be completed on your 2025 timeline.

John Tummazos-very independent research by John Tummazos-analyst

If I can ask another one. I remember that Kucing Liar's exercise results were very good in the 90s. How long have you been drilling and updating recently? Therefore, you can access and update these studies and get more information.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Mark, why don't we talk about...

Richard C. Adkerson - Chairman and Chief Executive Officer

Yes. We also-John, you may remember that Kucing Liar contains pyrite. So Mark, talk about how we work-this is an ongoing work project. It is independent of Grasberg Block Cave, Deep MLC and our other businesses. But Mark, maybe you can comment on how we update our analysis of Kuala Lumpur?

Mark J. Johnson - President of Freeport-McMoRan Indonesia

Yes. I mean, in the past three years or so, major changes have taken place, not new drilling. In the past few years, we did conduct some drilling. We re-examined some metallurgical work. The biggest change is that, as Richard hinted, the original KL mine plan focused more on higher copper equivalent grades, but it also has higher pyrite, which requires major changes to our processing. The new mine plan focuses on the slightly lower copper equivalent portion of the resources that are now reserves. We already-it is part of the ore body. Essentially, we leave the factory as is. The pyrite problem has been greatly reduced and almost eliminated.

Therefore, in terms of processing, power demand, and environmental management, overall capital has fallen sharply. In addition, in this new part of the new mine plan, the gold recovery rate in our mining area has risen sharply. We-in our initial reserves, a few years ago, the gold recovery rate was less than 50%. The gold recovery rate of the new plan exceeds 60%, and we think there is room for upside. Therefore, in conjunction with this new Kuala Lumpur plan, its capital intensity is much lower, the plan is much more robust, and the environmental management costs are much lower. One thing, Richard mentioned, is that it is independent, but in some ways, it is indeed linked. We share part of the GBC ore flow system. KL rises. And to match the GBC plan, we used some of the same conveyor belts. And most importantly, this new planned factory is relatively unchanged.

So John—yes, Mark. So John, this is not a competitive project of our Americas Growth Plan. I mean, as Catherine said, this is our long-term plan. It fits everything we do there. Then the trade-off where we invest in the Americas is that we will study the pros and cons of each project. In the United States, we have no royalties because we own the land and the ocean. Since our tax laws are carried forward over a long period of time, we have no taxes, and the tax rate in the United States is very low. So what I mean is all of this. This is an economic analysis after taxes and royalties. We will determine where we can add value most economically to our shareholders.

John Tummazos-very independent research by John Tummazos-analyst

We are very happy to see that it is bringing you money and good opportunities.

Kathleen Lynne Quirk - President and Chief Financial Officer

John Tummazos-very independent research by John Tummazos-analyst

Richard C. Adkerson - Chairman and Chief Executive Officer

Yes, this is a long and winding road, but it is great.

Your next question comes from the route of Michael Dudas and VRP.

Michael Dudas - VRP - Analyst

Yes. Good morning, Richard and Casey. Maybe follow up your thoughts on freeport investment. Of course, looking at after-tax returns, copper prices, etc., taxation, how much analysis will ESG involve, not only you, but the entire industry will have to work? Generally speaking, does this increase a major obstacle? Some-Obviously, you have to get a social license to operate, and we understand that. But is it more important? Will this help? Will this add barriers to some of the long-term investments that the industry needs to meet future demand?

Richard C. Adkerson - Chairman and Chief Executive Officer

This is not only-it is today. I mean, it is today. What I mean is that ESG problems are not common to all projects. They are all site-specific. When talking about our growth projects in Arizona, I made a point. I think you may have realized this. These projects are supported by communities and Native American groups. That's because we have been there for a long time, and we have devoted our attention and resources to these communities and provide opportunities beyond our individual business. Elsewhere, even if Arizona has a good view of mining development, from an ESG perspective, there are huge obstacles to development. You just need to look at Rosemont and Resolution and other projects. So you have to look at each specific project, each — the way the company provides it, but this is a huge obstacle, and it will grow. I mean, the number of groups involved in ESG concerns, you can see from the institutional investors you know. But the consumer group is very focused.

Car manufacturers are concerned about where their minerals come from and where their copper comes from. This is why the bronze mark I quoted is so important. So this will be-now this is a huge problem. This will have a major impact on supply development. so...

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. It has always been part of our project evaluation. This is especially true today, but part of our assessment has always been to use less energy and diversify our energy sources in order to find renewable energy. Water is a big issue in our management. When we were working on this project, we found a good solution in Cerro Verde, Peru, where we built a sewage treatment plant to fetch water. So instead of competing with other water in the country, we actually helped the community. Therefore, we have always made this project how to help the community as part of our project, and ESG has always been a part of it. As Richard said, it is only growing-getting bigger and bigger. I think you know this, but copper is really a great story. We don't have scope 3 emissions that other companies have to deal with. Copper is actually-the use of copper is actually for decarburization. But the Scope 1 and Scope 2 areas are areas where we work hard every day. They are part of our project development plan and capital investment plan.

Michael Dudas - VRP - Analyst

Yes. Appreciate these thoughtful answers. Thank you.

Your next question comes from Andreas Bokkenheuser from UBS.

Andreas Bokkenheuser - UBS - Analyst

thank you very much. Thank you for answering my question. It's just a quick operation problem, and it's actually divided into two parts. Obviously, we see a slightly higher output in the first quarter compared to sales. Can you comment further on the replenishment? I think you also said that some of Grasberg's gold sales may be postponed to the second quarter sales. So what is driving it?

Richard C. Adkerson - Chairman and Chief Executive Officer

OK. Let me solve this problem. We do not sell copper and gold in Grasberg. We sell copper concentrate. It has copper and gold in it. We get paid for individual components at LME prices. But as I mentioned before, what happened in Grasberg was that we reached our production target. We shipped these copper concentrates to the port for shipment. Due to various reasons, some shipments were delayed. That's it. When the concentrate is loaded on the ship, we will confirm the sales. So literally, all we have is that some of these sales will exceed the first quarter in the second quarter. It's that simple. In our entire operation process, we all have such a time issue. For those who follow Grasberg, we have the weather conditions in the port. This is a shallow sea, so weather conditions may delay delivery. But all of this is ultimately strictly an opportunity. It doesn't matter whether it is at the end of the first quarter or the beginning of the second quarter.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Generally speaking, our output is equal to our sales. We do have some in the United States and Indonesia. We did have some changes between production and sales, but it was just a matter of timing, as Richard said.

Richard C. Adkerson - Chairman and Chief Executive Officer

As you can imagine, we can sell all the products we produce. That is not a problem.

Andreas Bokkenheuser - UBS - Analyst

Absolutely. This is very clear. Then there is a follow-up question. You have obviously been mentioning that you expect production in Peru and Mount Verde to return to normal next year. Are there any other mines in your global portfolio that are now feeling the pressure of any COVID restrictions, or do you expect production to increase next year?

Richard C. Adkerson - Chairman and Chief Executive Officer

Well, we mentioned that we restarted-we have actually suspended operations at the Chino Mine in New Mexico, which is a relatively small mine, but we are resuming operations there. We lowered Morenci's mining rate and stripping rate to save costs. It will take some time to recover, and production will start from there. But this has no practical significance. Surprisingly, in the face of the extremely challenging COVID position, Mark and his team at Grasberg did a great job in achieving our goals. We have done a great job managing all of these and will continue to do so.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. What I want to say is that in South America, we currently face the most restrictions. But we are still dealing with issues such as agreements. So we will not relax our vigilance. We will continue to be very, very careful about the way we operate and ensure the safety of people. But in terms of logistics, it mainly affects South America.

Richard C. Adkerson - Chairman and Chief Executive Officer

OK. We have an internal medical director. We have cooperated with international SOS for many years. They have done a good job in helping us build testing facilities and facilities for handling infected persons. We can treat them and get them back to work. This is an ongoing process.

Andreas Bokkenheuser - UBS - Analyst

OK. This is very clear. Therefore, for South America, the expected plan is to start accelerating growth in the second half of the year, and then resume full-speed operation in early 2022. Is this the correct way of thinking?

Kathleen Lynne Quirk - President and Chief Financial Officer

Well, especially in Peru, our plan is to operate with this reduced freight rate throughout the year, and we will evaluate it as we proceed. But now, the initial assumption is that we will be in equilibrium in 2021, and then return to plan in 2022. This is the hypothesis. In Chile, this is a smaller operation, but we started to increase our mining and stacking rates there. The metal impact will happen in 2022, but we are only starting now. So-but our plan for Cerro Verde, the largest in South America, is to proceed at a slightly slower pace for the rest of the year. The team did a great job and exceeded expectations in the first quarter. But this is not an assumption that we consider to be cautious, because restrictions are still very, very important.

Andreas Bokkenheuser - UBS - Analyst

OK. This is very clear. thank you very much.

Richard C. Adkerson - Chairman and Chief Executive Officer

Your next question comes from the cooperation between Lucas Pipes and B. Riley Securities.

Lucas Pipes - B. Riley Securities - Analyst

Good morning, Richard, Catherine. Thank you very much for raising my question. Most of my questions have been asked and answered. But I want to go back, Richard, some of the comments you made before, think this is one of the best copper market prospects you have ever seen. Given-In view of this, when we consider the framework of capital retention and capital return, to what extent can this be subject to scrutiny? For example, we spent a lot of time talking about organic growth in this conference call. So is there an incentive to shift this ratio more toward growth? Then follow the same vein, mergers and acquisitions, what do you think of this? If so, what geography might make sense? Will you-would you consider producing mining machines or scheduled pre-production? I also hope to have any updated thoughts on this. But thank you very much.

Richard C. Adkerson - Chairman and Chief Executive Officer

This is a very good multi-level question. Let me see if I can answer accurately. Yes, I have been there for a long time. I said that there are three eras of copper demand. Before the early 2000s, they were all driven by the GDP of developed countries. Copper is the commodity most relevant to GDP, and it fluctuates according to the business cycle. China has emerged, and has been leading new demand growth for nearly two decades. When you see it, it all comes from China. The rest of the world is a bit flat. Today’s new era is so exciting that China’s economic growth rate has long been pointed out by people. COVID complicates all this. But its absolute demand for copper is so strong because the economy has grown, and this situation will continue—even if it shifts the economy to consumers and exports. It is - the absolute amount of copper it grows, even if the growth rate will decline, it will definitely not be strong.

Now, the reason why I am so excited now is that now you know-it is the recovery of COVID in developed countries, but in all these sports around the world, you clearly see it in the United States, pushing funds to expand the consumer population. All of these are moving in the direction of equality, and everyone realizes that we must do this. This will create new copper demand. Then my long-term story has always been that in an underdeveloped world, global growth, all people in the world who live under substandard conditions aspire to have better conditions, which require more energy, more transportation, communications, and more. Much copper. So that's why I said the demand side, for me, in a new era, it is really positive. On the supply side, I don’t know how it will keep up. I really don't.

Here, we have all these projects in Freeport. Copper prices may double overnight. Anyway, some people are talking about doubling it, but overnight. We cannot produce significant new works for many years, many years. So it’s really interesting to see prices — I’m just — unless there is some global disaster, prices, in my opinion, obviously have to go up significantly. Substitution must occur. The waste must grow. But how to meet this demand? This is why I am so excited about putting this company together after so much time and effort. John Tuomazos quoted it. I mean, we have gone through so much. But I remember that Katherine and I developed a strategy when we became copper-focused CEOs in 2003 and 2004. It's great here now, and it will take so many years to see its blossoms and fruits.

Andreas Bokkenheuser - UBS - Analyst

Kathleen Lynne Quirk - President and Chief Financial Officer

As far as mergers and acquisitions are concerned, what we really care about is our existing assets. We have development options in our product portfolio. We always monitor the content available externally and compare it with the content we own. so...

Richard C. Adkerson - Chairman and Chief Executive Officer

Let me add a little personal opinion. Our company has made a mistake, and other mining companies have also made mistakes in their forced mergers and acquisitions for strategic reasons. You just watch it over and over again. Phelps Dodge came to us as an opportunity. This is not a strategic plan. We talked to them about buying us. So our current situation is that we do not have a strategy to participate in the M&A market. But we will now be for the first time in a long time, if we have the opportunity to take advantage of it. Our strategy is simple: execute and invest our resources in a disciplined manner to provide value-creating growth. If something comes to us, we will be able to consider it, but this is not our strategic goal.

You mentioned starting operations, and we have been thinking about it all the time. But we are in trouble-making these economies work is a big obstacle, because to enter it, you have to pay for the value that has been created. When we have all these other resources in our portfolio, our stock price does not give them any value. So we see-to some extent, even interesting projects can operate economically for our company, which has always been a real obstacle. We have a very long sentence at Freeport: "Big mines become bigger, and small mines become smaller." So this is also a tricky question.

Lucas Pipes - B. Riley Securities - Analyst

Richard, Catherine, thank you very much for the color and good luck.

Kathleen Lynne Quirk - President and Chief Financial Officer

Your next question comes from the collaboration between Jatinder Goel and Exane BNP Paribas.

Jatinder Goel - Exane BNP Paribas - Analyst

Hi. Good morning, good afternoon. Thank you for answering this question. There is only one smelter. To be more clear, do you have only one participant, possibly outsourcing the smelter? Or are they multilateral? The reason for inquiring, you may have seen a press release or media article last week saying that Indonesia has signed a memorandum of understanding with ENSI, and in West Papua, it is said that Freeport also promised to provide 800,000 tons of raw materials, but this is not the case. It seems to be in line with the full scale of the smelter, or are you not sure if you only focus on one part of a smelter, or are there multiple elements? Thank you.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Today’s discussion is the most extensive, involving the Weda Bay project. The project you are referring to is located in Papua, which is a potential project. We are familiar with the developers there and said that if there is overcapacity, we may supply it. But our choice, for now, we focus on basic supply. We focus on this Weda Bay option or our project in Gresig.

Richard C. Adkerson - Chairman and Chief Executive Officer

Yes. We-In response to your comment, we have not made any commitments to the supply of the Papua project. For many years, we have been hoping to see the smelter developed in Papua because we hope to help the local communities there. However, the cost of infrastructure, the lack of infrastructure, the timing and investment of infrastructure have become impractical in the past.

Jatinder Goel - Exane BNP Paribas - Analyst

This is very clear. thank you very much.

Our last question will come from Brian MacArthur and Raymond James.

Brian MacArthur-Raymond James-Analyst

Hi. Good morning. How are you today? I want to go back and talk about KL, because in the end, after years of approaching, it sounds like the project has indeed changed, as for John's comments. So I just want to try to understand, because when you look at this grade, at this point, the reserve grade is 0.9 copper per ton and 0.9 grams of gold. So it is a little bit more than some other gold. So in this new plan, I think my first question is that you talked about certain areas of the ore body. Are there any higher-level areas you started that will help the economy? My second question, it sounds like the new plan can obviously save capital expenditures, which is good. Technically, it might be easier, which is good. But then you talked about lower copper equivalent, so I want to figure out how much lower copper equivalent is? Second, obviously, this also depends on price assumptions. So this sounds great.

Kathleen Lynne Quirk - President and Chief Financial Officer

Yes. Let's let Mark talk. But-there are some mines-we did the same with the development of Grasberg Block Cave. We modified it over time to focus on the lowest pyrite part. What Mark will tell you is that in Kuala Lumpur, we redesigned the mine plan to reduce capital intensity, because in order to obtain pyrite, the factory needs more capital, requires more environmental management, and the recycling rate starts to decline. You mentioned 0.9, but its recovery rate is very low, some ore. Therefore, we have formulated a more optimized plan here that can reduce the initial capital expenditure and moderately change the total ore volume. But from a metal perspective, you will actually end up with similar metals because your recycling rate is higher. So Mark, you want to add to...

Richard C. Adkerson - Chairman and Chief Executive Officer

Just-then we will turn to Mark. But it is not that complicated. This is-we have designed a new mine plan to avoid and minimize the pyrite part. So-by doing this, we have reduced the investment in the factory, and there must be a pipeline-you are always there, a pipeline from the factory, along the lowlands to store pyrite and lowlands. So Mark, this is more like an engineering design decision, it can get all these economic benefits more than anything else. mark?

Mark J. Johnson - President of Freeport-McMoRan Indonesia

Yes. I think the main progress is to understand-not necessarily the highest grade, but we are the highest value capital investment in the ore body. If it were not for debts-our contract with the government could be extended to 2041. Otherwise, the material we postponed will also be retained. So what we are doing in this new plan has been advanced-about half of the old reserves overlap with the old reserves. Then there is the other half, we postpone part of the lower-value ore, and can replace it with higher-value ore. The order we are currently mining will be sediment, very similar to what we have milled in DOZ, Deep MLZ for many years. The old reserves are very concentrated on this fault of the highest grade, but as Richard and Catherine mentioned, there are some greater challenges, and we have to grind it finer with the new mill. This brings additional power requirements. Then we have to manage the pyrite, which for us is to isolate it from [Mod-88] and store it separately.

Therefore, by identifying all the costs associated with certain higher copper equivalent grades, this is a combination of copper and gold values ​​and replacing it with a focus on value rather than copper equivalent alone. If we have the opportunity to mine after 2041, we come up with a more optimized mine sorting and have the opportunity to track other materials in the future.

Kathleen Lynne Quirk - President and Chief Financial Officer

And as Mark said, reduce risks, more robust plans. We are now doing something to continue trying to increase the recovery rate of these gold.

Brian MacArthur-Raymond James-Analyst

Can you accept this new plan-I mean, I forgot the original rate you thought KL would pass it. You can really offset it with a higher mining rate, because I think your factory capacity is still 240,000 tons, right? Will that offset it? Or is the ratio there still the same?

Richard C. Adkerson - Chairman and Chief Executive Officer

This is very similar to our previous mining rate. The tonnage is similar. It is a little bit less because we started a little late. But this does fill up the 240,000 tons of mill capacity we will have in Seg 3. Therefore, there is obviously a district-wide plan where we sort all the ore bodies to fill the mill in the best way. This will reach a peak of 90,000 tons per day, which is slightly higher than what we plan to do with Deep MLZ. As GDC starts to fall, it will rise. Therefore, this is the balance of the first opportunity for the highest value materials to obtain factory space.

Brian MacArthur-Raymond James-Analyst

great. This is very helpful. This certainly sounds like a capital-intensive project adjusted for profit and risk. I guess it might have been what we thought of when we first saw this 15 years ago.

Kathleen Lynne Quirk - President and Chief Financial Officer

Richard C. Adkerson - Chairman and Chief Executive Officer

Brian MacArthur-Raymond James-Analyst

Kathleen Lynne Quirk - President and Chief Financial Officer

Now, I will pass any closing remarks to management.

Richard C. Adkerson - Chairman and Chief Executive Officer

240,000 tons per day come from underground operations. I will do it. Thank you very much for answering our call, and we look forward to continuing to report on our progress this year and the next few years. Thank you.

Kathleen Lynne Quirk - President and Chief Financial Officer

Richard C. Adkerson - Chairman and Chief Executive Officer

Mark J. Johnson - President of Freeport-McMoRan Indonesia

Joshua Frederick Olmsted - President and Chief Operating Officer, Americas

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