Freeport-McMoRan Inc
NYSE:FCX
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Freeport-McMoRan Inc
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Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Ms. Kathleen Quirk, President and Chief Financial Officer. Please go ahead, ma'am.
Thank you, and good morning, everyone, and welcome to the Freeport-McMoRan conference call. We released our results this morning and a copy of today's press release and slides are available on our website at fcx.com.
Our call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today.
Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our annual report on our Form 10-K.
On the call with me today is Richard Adkerson, our Chairman and CEO. We’ve got Mark Johnson, who leads our Indonesian operations. Josh Olmsted, who leads our Americas operations. Mike Kendrick, who leads our Molybdenum business. Steve Higgins, who leads our commercial activities and is our Chief Administrative Officer as well. And Rick Coleman, who leads our project development activities. And I'll start with briefly summarizing our financial results. We will work through our slides and some prepared remarks and then we will take your questions.
Today, we reported first quarter 2021 net income attributable to common stock of $718 million and was $0.48 per share and adjusted net income of $756 million, or $0.51 per share after adjusting for net charges totaling $38 million, or $0.03 per share, and a detail of those net non-recurring charges are in the press release on Roman numeral 6.
We reported adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA during the quarter of $2.04 billion and we have got a reconciliation of our EBITDA calculations on Page 36 of our slide deck.
In the first quarter of 2021, we had copper sales of $825 million pounds, which approximated our estimate. Our gold production in the first quarter of 2021 was in line with our estimate in January. However, we had a deferral of certain shipments in Indonesia to the second quarter and that resulted in a timing variance for our gold sales.
In the first quarter, we benefited from improved pricing. Our first quarter average realized copper price was $3.94 per pound, substantially above the year ago quarter and our gold price of $17.13 per ounce was also above the year ago realized price.
We continue to focus on maintaining low-cost position. Our consolidated average June net cost for our copper mines averaged 139 per pound of copper in the first quarter. We generated strong operating cash flows totaling $1.1 billion and that was net of $300 million of working capital uses. And the cash flow has exceeded capital spending, which totaled $370 million during the quarter.
As you've seen our Board in February, adapted a new financial policy aligned with our strategic objectives of maintaining strong balance sheet, increasing cash returns to shareholders and advancing opportunities for future growth. We ended the quarter in a strong financial position with $4.6 billion of consolidated cash, $9.8 billion of debt and our net debt - our debt net of cash was $5.2 billion at the end of March.
Richard, I'd like to turn the call over to you and we'll start reviewing the slide materials that are on our website.
Thanks, Kathleen. I couldn't be more pleased to be able to review with you our first quarter performance and particularly exciting progress we've achieved over the past year where we all faced such uncertainties. It's a special active invigorating time here at Freeport. Our teams are working safely. We remain diligent with COVID as we have successfully executed our operations plans and we're now working on projects for future growth.
Our Grasberg underground ramp up is proceeding on schedule. That's key for our strategy. Production in the United States is increasing with our newly commissioned Lone Star mine, the first quarter start - restart of our Chino mine in New Mexico and from increased mine rates where we at Morenci, our flagship mine in the U.S., the largest in North America where we could curtail production a year ago to conserve cash.
In South America, we're working to restore production levels to pre-pandemic levels and we'll achieve that over the next 12 months. The Cerro Verde team in Peru and our El Abra team in Chile are doing outstanding work in navigating these issues. We are focusing on sustainability initiatives as all businesses are. This has always been key to Freeport in managing our operations.
We are moving to certify each of our operations with a new Copper Mark. This Copper Mark is an industry framework that was recently developed by the International Copper Association to ensure responsible production consistent with UN Sustainable Development Goals. Today, we leave the industry with six of our operations now certified and we're working to get all certified.
Going to the slides, I have just a few slides to review with you. On Slide 3, our annual sustainability report has been published and is now available on our website. This is the 20th year we've reported on sustainability. We're working to make it better. I encourage all of you - each of you to read it. We're proud of our good work on sustainability and remain committed to continuous improvement.
Past years, we released this report with our annual shareholders at our Annual Shareholders Meeting. We moved it up. We've added new resources to our Freeport team working on sustainability issues. And I congratulate this team for their efforts to make this report available now earlier, so that we can facilitate our expanding engagements with the broad set of constituencies that are now focused on our sustainability performance and initiatives. Last year, we published our initial report on climate. Our 2021 report is forthcoming.
We’ve recently published our annual report to shareholders with what I think is a great thing charging ahead responsibly, reliably, and relentlessly. This theme portrays where we are currently positioned at Freeport as a leading and growing global copper producer. We are determined to succeed and operate responsibly and the Freeport tradition will be relentless in the execution of our strategy.
Slide 4. First quarter production was in line with our targets. We increased our 2021 sales guidance to 3.85 billion pounds of copper and our 2022 volumes to 4.4 billion pounds. The Grasberg ramp up that I referenced earlier continues to progress in a simply outstanding fashion. We've now achieved 75% of our annualized targeted long-run metal production run rate. We're on track to be at 90% by the third quarter and full rates by year-end.
After all these years of hard work, reporting this progress is simply a highlight of my career. The credit though goes to our team on the ground in Indonesia supported by our global team of technical experts. This is a historical major accomplishment as we've converted, as we are in finalizing the conversion of the Grasberg open pit to this massive underground operations.
Americas businesses are going well. We are achieving production and cost targets and now we're accurately focusing and working on future growth opportunities, generating strong cash flows, improving our balance sheet.
Over the past 12 months, net debt was reduced by over $3 billion to $5.2 billion by the end of this first quarter. But during this period, copper price averaged $3.13. It's now over $4.25. Many are predicting higher prices near-term. Our near-term outlook of copper and gold sales volumes is substantially higher.
Our recent performance this large reduction in debt with lower commodity prices, lower production volumes demonstrates the current strength of our company in generating cash flows. Our strong performance and the positive outlook for our business and the commodities has enabled our board to adopt a new financial policy which will provide increasing cash returns to shareholders while providing flexibility for growth and building a very strong balance sheet.
We've also added two new directors David Abney, the retired chairman CEO of UPS with his massive global supply chain operations and Bob Dudley the retired CEO of BP a long time leader in the global extractive industry have joined our board. Each of these men have strong knowledge and experience in global markets and with issues we face in managing our business. Bob and David had many opportunities to join other boards. Their decisions to join our boards is personally gratifying and appreciated. They're really enthusiastic about working with their fellow directors at Freeport and our management team and creating value responsibly for all stakeholders.
Moving to Slide 5. Countries around the world responding to COVID with aggressive fiscal and monetary policies. Now this is an important element of near-term demand for copper extending beyond China. China has been the driver of copper demand growth over the past two decades. Now the source of new demand is expanding. In addition to continuing strong copper consumption in China, higher copper consumption in developed countries with COVID recovery initiatives and the increasingly important demand in emerging markets driven by global growth copper now has major new sources of demand from global investments in carbon reduction, infrastructure and expanded technology 5G, Artificial Intelligence and data analytics broadly all require more copper.
Importantly copper is essential to the transition to a global cleaner energy future. Roughly 70% of copper is used to deliver electricity. As clean energy initiatives are implemented copper intensity in the economy expands in a major way. The outlook for copper has never been better.
Slide 6. Significant demand growth is inevitable. Supply to meet this growth is severely challenged. It's going to require meaningfully higher prices to support mine investment. The combination of rising demand, scarcity of new supplies, point to large impending structural deficits supporting much higher copper prices than previously anticipated. I'm sure you've noted this in recent forecasts by a widening group of industry analysts. Freeport is notably well positioned to benefit from these fundamentals.
A leading responsible large-scale producer of copper with near-term and longer-term growth embedded in our portfolio. The scarcity value of a portfolio like ours is unique. It's extremely valuable now and it's going to be even more valuable as large market deficits emerge.
Slide 7 highlights our near-term growth. For 2021 copper volumes are anticipated to be 20% higher and gold volumes 50% higher than in 2020, 55% higher than in 2020. Volumes are expected to grow further in 2020 in the 15% to 20% range for both copper and gold. The capital to achieve these near-term higher volumes and the execution risk are largely behind us. Higher volumes with low incremental costs yield expanded margins at prices ranging from $4 to $5 for copper we would generate annual EBITDA for 2022 and 2023 of over $12 billion to the range of $17 billion per annum. That's big numbers.
Page 8 describes this new financial policy our board adopted earlier this year. It's designed first to support a strong balance sheet, increase returns to shareholders and provide funds for investments for the future.
The current market for copper and its favorable outlook are providing substantial cash flows to meet these objectives as I just outlined. Our board approved a base dividend of $0.30 per annum per share. The first quarter dividend will be paid in May as we resume dividends.
After reaching a target net debt in the $3 billion to $4 billion range which at today's prices will do by the end of this year our board's policy establishes a performance-based payout framework for additional cash return to shareholders through dividends and potentially stock buybacks. Returns to shareholders will be determined by allocating available cash flow of up to 50% to shareholder returns and the balance available for future growth and potentially further debt reduction below our target at $3 billion to $4 billion.
Our board will assess the additional payout at least annually. With a current level of copper prices and the outlook for copper and gold prices the numbers nor above point to a large cash returns to shareholders with substantial financial resources available for future growth investments.
Slide 9 describes some of these growth investments. We have multiple options across our portfolio. We resumed our work that we suspended a year ago because of COVID to evaluate and the timing and the initiation of these opportunities. In the U.S. we're looking at expansions at Lone Star and bagged in and also evaluating opportunities to increase production from [leach] recovery technologies that's really exciting.
The Lone Star mine is our newest mine. It's adjacent to our existing operations in southeast Arizona where the companies operate as operations go back to the 1800s. There we have strong community support. We have great relationships with the native American groups. We're evaluating expansions of Lone Star oxides ore which we're now producing and which are growing in terms of the availability of ores but importantly we're also conducting these longer range planning for the development of what looks to be a potentially world-class sulfide resource right in the midst of this historical mining area.
At Baghdad in Northwest Arizona we have an opportunity to construct a new concentrator to double production. We have a very long reserve life there. Also there we have strong community support. I keep emphasizing this because that's a challenge for new supply development around the world.
We're focused on technology to reduce capital intensity in these projects. [Leach] technology initiatives provide substantial opportunities in this regard to add value all across the portfolio.
We're continuing to evaluate an attractive potentially significant expansion of our El Abra mine in Chile, where we're partners with Codelco. This project would require larger investment longer lead times than our U.S. project. Resource is attractive and very large and this signifies that a major future expansion of El Abra is likely.
We're evaluating the development of a new deposit an undeveloped deposit at PT-FI in Papuan Indonesia it's called Kucing Liar. This copper gold project involves a large block cave mine using the substantial infrastructure already in place for Grasberg. It would benefit from our expertise and long track record of success in block gating.
We're also and this is a lot of fun evaluating a series of interesting investments in projects that support our carbon reduction and other sustainability goals. This involves ideas of developing a new energy generation as clean renewable for our operations in nearby communities and we're advancing plans for exciting projects at Atlanta Cop and Spain to recover valuable metals through recycling electronic devices which again is good from a sustainability standpoint.
Now we have these opportunities we're going to be disciplined by making new investments by being selective and measured and deploying capital, focused on value-added investments and do this because we have such long-lived reserves, established license to operate and we're going to work with communities effective by new investments.
Slide 10 points to this reserve position. Our reserve life is over 30 years. Now that's proved in probable economically recoverable reserves. In addition we have identified over 100 billion pounds of copper from mineral resources beyond reserves. All part of our existing operations we're going to be working to incorporate these into future reserve editions and mine plans. It is becoming increasingly more challenging and costly for our industry to develop supplies to meet the dramatically increasing demand for copper and our team literally loves where our Freeport is situated in this environment.
Slide 11 we have strong operating franchises in the U.S., South America and Indonesia. In all these localities we've earned the trust and respect of our partners, our customers, suppliers, financial markets, and most importantly our workers communities in the countries where we operate.
We have significant development large-scale operating expertise development and large-scale operating expertise. We have all the capabilities now to undertake new projects anywhere in the world regardless or the situation in a responsible and efficient manner.
I want to close by recognizing the people of Freeport around the globe, their commitment, dedication, remarkable achievements over the past year of COVID is really special. In the context of all the challenges our team has faced over the years and we've overcome I'm just immensely proud of this team. Building on these accomplishments with an increasingly bright future Freeport is charging ahead responsibly, reliably, and relentlessly.
Kathleen's going to review the financial results with you.
Thank you Richard and I will just make some brief comments on our financial and operating matters and then we can take your questions. Starting on Slide 14 we provide some additional details on our operating activities. You can see in the U.S. the Lone Star mine is operating well. We see opportunities to continue to increase our stacking rates there and fill up the tank house which has a capacity in the 285 million pound per annum range.
With continued success and increasing the mining and stacking rates we will have an opportunity for relatively low incremental investments, increased production from the Lone Star oxides well above the original design. We restarted Chino in the first quarter at a 50% rate and as we gain the efficiencies we are targeting there likely have opportunities to ramp up further.
At Morenci we're increasing mining rates by about 10%. This was previously planned for 2022 but we are accelerating this which will give us additional production in 2022 compared with the earlier plan and set us up for growing production over time. In South America the team was able to achieve stronger rates compared with our plan. Because of the operating restrictions in Peru we felt it was prudent to maintain our plan this year at a milling rate of 360,000 tons per day and we expect to ramp that up over the next 12 months to the 400,000 a day level as COVID restrictions are lifted.
At El Abra we're making great progress increasing our operating rates to provide additional copper in 2022. As Richard mentioned at Grasberg we made excellent progress in the first quarter continuing to execute the ramp up plan to retreat our targeted metal run rates by the end of the year. We ended the first quarter with more inventory than originally expected and these sales will be recorded in the second quarter. You will note from our detailed schedules and the reference material that we made some small changes in the Grasberg block cave and Deep MLZ mine sequencing. The net effect of these were not material to our metal production and the outlook is similar to the prior plans. We're very encouraged with the scale of the ramp up going on both at Grasberg block cave and Deep MLZ. We will be adding a second crusher at Grasberg block cave this quarter which will set us up to continue to increase rates there.
On the next slide we provide an update on our plans to develop new smelter capacity in Indonesia to meet our commitments to the government. We're proceeding with our Japanese partners at PT smelting to expand the existing smelter. This can be done on a relatively low-cost basis and would reduce the required capacity for the new smelter to 1.7 million tons of concentrate per annum.
The cost for PT smelting is roughly 250 million and PT-FI would fund these costs through a bank financing which is currently in progress. As you've read we have been engaging in discussions with third party for the balance of the requirement whereby this party would build a new smelter under a structure similar to what we developed for the PT smelting existing smelter in the 1990s. To date the parties have had extensive negotiations but we have not yet reached acceptable commercial terms.
In the interim we're continuing our planning on the greenfield project in East Java. As we show on this chart on the right you'll see that the long-term cost, the economics for the financing of the smelter which we would plan to finance with debt would be offset by a phase out of the 5% export duty we're currently paying. So the economic impact for PT-FI is not material.
On slide – on the next slide, Slide 16 where we provide our three-year outlook for copper volumes, gold volumes, and molybdenum volumes. We are increasing our copper sales volumes in 2021 to 3.85 billion pounds from the prior estimate of just over 3.8 billion pounds and we've increased our 2022 guidance by 100 million pounds to 4.4 billion pounds of copper and that's reflective of incremental increases in the U.S. The rest of the sales estimates are largely unchanged. As Richard mentioned we're continuing to assess additional incremental near-term growth opportunities while we conduct our longer range development planning.
We provided on Slide 17 an overview of our estimated unit net cash cost for the year. You will note that we have updated our estimate to average 133 per pound of copper in net unit cash costs compared with the prior estimate of 125 per pound. A large portion of this increase is associated with higher royalties, duties and profit sharing related to the change in price assumptions from $3.50 per pound of copper to $4 per pound. We've also increased our cost estimates to reflect higher energy costs principally oil related which our forecast is now higher by about 25%.
Our team continues to do a great job in managing cost efficiently. We have seen some increases but they have not been significant. Our team continues to look for creative ways to maintain our low cost position.
On Slide 18 we show the significance of cash flow generation using our volume and cost estimates and we provided sensitivities ranging from $4 per pound copper to $5 and we hold gold flat at 17.50 per ounce and molybdenum at $11 per pound. The growth in volumes at low incremental cost results in very significant EBITDA generation. You can see here ranging from over 12.5 billion per annum on average for 2022 and 2023 at $4 copper to 17 billion per annum at $5 copper. Operating cash flows under these price scenarios would range from nearly $9 billion to $12 billion and these cash flows are significantly above our planned capital spending providing substantial free cash flows as we go forward.
On Slide 19, we show our capital project forecast and we show projected capital of $2.3 billion in 2021 that includes potential spending on the Indonesian smelter which again would be debt finance but these, the 2021 guidance numbers are very similar to what we had in our previous reports. Our 2022 capital of $2.2 billion on a consolidated basis is about $200 million higher than our previous forecast and that incorporates an acceleration of mining investments to bring volumes forward and provide capacity assurance for our plans. We've entered, we are in a strong financial position an event a period of exceptional free cash flow generation.
Slide 20 kind of shows you that the exceptional cash flow generation that we have in the business. You can see on the slide where in a six month period of time our cash balance has increased by over $2 billion.
Our long-lived asset base, our growing production profile, strong markets provide the ability to continue to strengthen our balance sheet, provide cash returns to shareholders and build additional values in our asset base. Our financial policy that Richard talked about earlier is designed to tick all of these boxes and we look forward to executing on these plans.
And in closing I just say the echo what Richard said it's an exciting time at Freeport. We've got the right assets at the right time and we're staying focused on continuing our momentum and now operator we would like to open a call for questions.
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Emily Chieng with Goldman Sachs. Please go ahead.
Good morning, Richard and Kathleen. Thanks for the update here today. Just a question around the capital allocation policy and I appreciate that you updated this a couple of months ago. But certainly sounds like there's a significant amount of cash returns potential upcoming if we were to assume current copper prices.
But maybe on the other side of that, could you discuss how you're thinking about when the right time to sanction growth would be? And any color you can provide on sort of long-term or sustainable copper prices that you would need to see or need to base case in your assumptions for this? And then you mentioned being disciplined and selective, but as you look over the next couple of years, at what point would you start considering not pulling the trigger on growth?
So Emily, we are - we have suspended all of our studies on growth projects a year ago. And now, we've resumed those analysis with the purpose of understanding the pros and cons of each of the projects and developing an evaluation of them. That basic work of evaluation, we expect to continue at least through the end of this year. And by the end of the year, we hope to be able to have a clearer path forward.
So it will be some time before there is any commitment to actually initiate significant capital spending. And then in the meantime, we pointed to all the volume growth that's coming about from Grasberg, the resumption of operations from COVID, et cetera.
So we're going to have increasing volumes with strong prices and high cash flows with limited amount of capital being spent because we just won't be ready, as you say, to sanction projects. We don't have any particular target at copper price. We've always looked at a scenario of different prices that of how a new project would fit into our portfolio. We want to take advantage of these resources that we have and yet have risk managements by how they fit into all of our existing portfolios. So we don't look at it so much on an individual project by project basis, but how does it fit in with our projects.
Freeport really benefits from the fact that we operate all the projects we have interest in. So that allows us to approach these on a – from a consistent corporate strategic basis as opposed to an individual project by project basis. Certainly, at these price levels, our projects are economic. And now you know the prospects are for prices to go much higher.
So I anticipate that over time, we will be spending money on capital. That's just not going to happen in the near-term and that's going to be a feature of the entire industry because even when we decide to spend the timeframe for developing a project is multiple years, minimum six to eight years.
So all of that's going to be, as you well know, Emily, because you write about it all the time, that's going to be very supportive of copper prices. You can't turn on the valve quickly to add new mine supply. And when you can't do that and volume and demand rises that translates into higher prices.
Got it. That's very helpful color. And one quick one if I could squeeze it in. just an operational update at the Grasberg Block Cave and Deep MLZ. Looks like sales volumes maybe moved out a quarter a little bit. But anything you can provide on sort of the sustainability of the copper grades we're are seeing, any ramp profile comments that can pace the drilling, belling there, please? Thank you.
We got Mark Johnson on. Mark, you want to just give an update on.
Yes, we're generally on plan. Grades are tracking well from the model to what we see at the mill. In fact, we're fortunate that the mills actually seen a little bit more grades and the mine has recorded as pending. Drawbell opening, it's probably shown in the slides that we did make some adjustments in Deep MLZ.
We slowed down the cave advance in some of our diorite rock types, which are the more challenging rock and accelerate the cave advance and some of the scarring going off to the west in PB2. In GBC, we've added – accelerated our drawbell opening. And over the five years, it's relatively the same.
Great. That's helpful. Thank you.
Yes. And the fact we referenced delay in shipments that had nothing to do with operations. The inventory was there on site. There were loading, shipping some administrative issues with the government, and so all that inventory was produced on site now will be sold. And as inventory built, we were able to advance some maintenance activities from the second quarter to the first quarter, all of which is really supportive of meeting our plans going forward.
Our next question comes from the line of Chris LaFemina with Jefferies.
Hey, thanks for taking my question. Good morning.
Good morning.
Just questions about this, Richard, how are you? The question is about the performance in South America. It was good to see that you appear to be operating well there despite the escalation of COVID, but we have some political risk that is potentially escalating there as well, especially in Peru with the upcoming presidential run-off.
So the first question is related to the contracts and licenses that you have in Peru. Is it similar to what you had in Indonesia, where you have a stability agreement with international arbitration provisions should something go wrong in terms of government trying to significantly increase taxes or try to nationalize the mine? Is that you have the same sort of protection there?
Yes, we – yes, the answer to that is an absolute yes. And we - stability agreements has been a feature of the operations in Cerro Verde since way before Freeport. But we were able to get a new stability agreement as we expanded the business. And you know, there is always a correlation between the aspirations of government and workers for more funds as copper prices rise. But the copper is so critical to Peru in terms of a country that still faces challenges of poverty and so forth.
So we just step back and watch political environments. We know we have to work with whatever governments wherever in the world that a country selects, but we do have strong rights to do that. And unlike some operations in Peru, we have positive relationships with the local community because of social investments we've made in water and wastewater projects.
So our team there is just, I mean, I can't tell you what a great job they go. A year ago, we were really worried about Peru. Our workers lived in the city of Arequipa. It was real issue with community spread, but we've been put to work the community, developed temporary living and we got our rates up to near our original run rate targets and we can expand further as we go forward. The team there has just done a remarkably good job...
So very good to hear. Thank you for that. And then…
In terms of stability agreement, we do our taxes are fixed in that agreement, and they are actually higher than the current statutory rate in Peru. So we've paid harder to get the stability and we also pay a lot with the communities and big employer. We have a profit sharing mechanism there. And that's partly why you saw the cost increases that we do is the mine becomes more profitable with higher prices. There's a large profit share and that goes to employees, partially to employees and partially to the country. So it's a good model to share economics both to the local communities and country and workers and to the investors.
Great. Thanks and with respect to potential expansion at a El Abra we're hearing from other Chilean miners about challenges getting permits. It seems like in some cases, permitting is nearly impossible, which I suppose for the copper market is pretty bullish if companies can bring capacity online in Chile, but I'm just wondering, in terms of El Abra what sort of permitting hurdles you might have to actually spend that asset. Thank you?
We will have an environmental impact statement that will file in connection with the project. So that is a very comprehensive permitting process. We've gone through it before and you have to do a lot of baseline work, etc. So there is a lot of work you have to do before you actually submit it. But that project partially is, the permitting is partially why Richard saying it's six to eight years out.
Okay. Thanks.
And the best environment, Chris, it's going to take a long time to get that permit. Now, we don't have some of the costs of where this mines located. And the fact that it's been a long running existing operation is near Codelco mine. It doesn't have some of the permitting issues that others have. A major mill expansion would require a desalinization plant and the cost of transmitting that water up to high altitude where we operate but it's in a setting where we don't face some of the challenges others face. But best case it takes a long time and it's a big project.
Great, thanks.
Our next question comes from the line of Alex Hacking with Citi.
Good morning Alex.
Hey Richard, how are you? Good morning. Just following up on Chris's question on Peru. I'm not sure how much you can answer here but has there been any engagement yet between the mining industry and the candidates particularly the candidate that's leading in the polls? And then secondly, regarding your production footprint with Chino back and Cerro Verde heading back to full rates, does that put Freeport's production footprint back at normalize pre-COVID levels or is there a potential future upside at these prices? Thanks.
I'll take the second one first. Just in terms of the ramp back up we've made the decision to start ramping El Abra back up. That's in progress. We expect to get back to pre-COVID levels there in 2022. That's reflected in our guidance. Same with Cerro Verde. In the U.S. we had cut back the mining rates significantly. We're starting to ramp those back up. We have some opportunities, still have some opportunities at the Morenci that aren't baked into our forecast yet. And then we have opportunities at Chino, because our plan right now is running at Chino 50%. In addition to that, as we mentioned we have some incremental opportunities potentially at Lone Star. So I would say in the U.S. we do have some opportunities that aren't in our near term plans. That will be -- we'll be assessing as well as some of the leach technology applications that Richard referred to earlier. So we do have some near term opportunities not in our plans but a –
Hey Kathleen let's let Josh make a brief comment about that. Josh Olmstead was named this past year to be our Chief Operating Officer, Americas. He's been number two guy for many years. He's a young guy but he's got a long career in Freeport is just doing an outstanding job and bringing energy and leadership to our group. So Josh make a couple of comments.
Thanks Richard. As Kathleen was stating we have some near-term opportunities with Morenci, Lone Star incremental things. The most exciting piece I think is the work that we're doing on the leach technology that both Richard and Kathleen touched on. If we can prove out some of the concepts that we've identified and began working on it could have a significant impact on our ability to take advantage of long-term stockpiles that we have out there that contain copper today that we haven't been able to extract and so this leach technology really could be meaningful as we look for opportunities to get some incremental, low-cost incremental copper as we move forward and so our plans are working on that this year with the goal of having very similar to Richard's comments about the bigger scale projects having much more clarity by the end of the year on what that looks like and what the potential value is for us but we're super excited about what we're seeing so far.
So restarts technology reaching all those point to growing volumes from our traditional operations Chris. Alex right we're at Alex now. so Alex on Peru man how complicated politics everywhere in the world and in Peru as they were approaching this runoff you had a half dozen more candidates each having 10% plus or minus support in the polls. So it was very complicated. Freeport stays out of politics. As I said we don't, we just run our business, support communities, be prepared to work with whoever emerges in the political process. The mining industry in Peru is there is an active mining association that's led by Peruvians and they engage with candidates to understand and interact and communicate with them on policies affecting mining and I'm sure they'll be working with both of these candidates as we go forward and you will notice the candidate who earlier was being very aggressive and talking about mining is now making comments about the importance of mining to Peru. So all of that will come to play and we'll just have to see what happens.
Thank you very much.
Your next question comes from the line of Timna Tanners with Bank of America.
Hey good morning. Thanks for taking my question. I wanted to ask you a little bit, hey there, I want to ask a little bit more about costs. Obviously you went through in nice detail about what caused the incremental cost in the quarter and in the guidance but obviously costs are rising inflation is a big topic I mean do you think that this encapsulates the future costs that you could bear fully or are you seeing further pressure and can you detail where that could come from and a little bit of what you've been seeing in more detail?
So the first point I want to make is a point Kathleen referenced earlier. Some important elements are of our cost are correlated to copper prices. They're correlated I mean things like royalties, profit sharing plans, labor cost in general there is correlation. Then there is other input costs that are correlated. Energy costs which is an important element our cost and with energy costs have risen in recent months.
Copper prices have risen even more thankfully but energy costs are are built into that and then certain other costs are seeing some inflation. So far energy costs are the ones that outside of the profit sharing loyalty costs are the ones that have the biggest impact and as time goes by and copper prices rise we'll have to deal with inflation but we have such strong margins, we have a great supply group team that works with our suppliers to offset costs wherever we can.
We're working really aggressively to do that. So Tim I think I mean I know you realize this because you're right about it but inflation is good for copper. I mean inflation is good for copper with what the world's doing today with all this spending on COVID recovery with spending around the world that's being driven to the deal with economic inequalities. That's pushing money to people who consume and create economic velocity which creates demand for copper. So in the broader sense all these forces will work to the benefit of our company.
Yes. What's been interesting is you look at today four and a quarter copper last time copper was four and a quarter, oil wasn't at 60. It might have been [$110] a barrel. So we are benefiting from the lower energy prices even though they have come up some the historical correlations just aren't, as correlated as they once were. And we go through a review each quarter on where we are with our supply chain and revise our forecasts every quarter to reflect current pricing and that sort of thing. So that's baked into these plans. And as Richard said whether we'll have additional cost pressures from tightening freight markets or other supplies we'll have to see where that goes. But right now the forecast that we developed is based on what our pricing contracts are currently.
The high quality problem, but if we're assuming a bit higher copper price for example, we should also be incorporated sounds like some assumption of inflation as well?
Well as I said, the answer is yes. There's correlations, I mean, royalties rise, profit sharing rise and then you make your judgment about energy, steel costs and so forth. But and I know a broken record Tim, that I know you understand. But bottom line is margin rise. For many businesses these inflationary movements deteriorate margins. Historically our margins have stayed very strong as copper prices rise and other costs rise.
Now, for sure, that's clear. Thank you.
Thank you.
Your next question comes from the line of Matthew Murphy with Barclays.
Hi. I have a question on the Indonesia smelter and wondering if you can help me understand the risks around the pace of the project. So there was the disclosure in your 10-K about the sign and there is been some comments in the press and just wondering what you're expecting? Is it possible through this discussion and looking at the options that you could see more fines or you could see more frustration from Indonesian government or do you think it's going the other way, and it'll get resolved.
I'm going to let Kathleen talk about this. She is working actively with the parties there and negotiating the terms. We are going to cooperate with the government. We made a commitment in December 18 to build a smelter and I'm very clear that we recognize that commitment and we are prepared to honor it. There are different views within the government of Indonesia. When you reference the government it can be interpreted as being one group.
There are different views within the government itself about whether it's despite this development [indiscernible] or go forward with the project at Gresik that we initially started and so we are working closely with our partner and shareholder mine [indiscernible] and with the Ministry of state owned enterprises, with the Ministry of Energy and Mines defined what is best, what decision the government off we made and we're prepared to go forward provided we have if we go in the direction that where we have reasonable terms and reasonable regulatory environment. So Kathleen why don't you talk about this and mine ministry wants to push us I believe we will resolve this situation and that everything's going to be okay. Kathleen would you give some detail.
Okay. Under the regulations the government grants annual export licenses and then there is a six month check to evaluate your progress against the smelter development schedule that they have and they have approved. As a result of COVID as we said during 2020 we notified the government that our schedule was impacted by the pandemic and they will force majeure conditions that prevented us from you from achieving schedule. And under regulations, there is a potential for fines if you don't achieve the schedule. And that's what the government did. They levied this fine and we have gone in and explained to them the reasons why the project was delayed and that this was force majeure, which is allowed under the regulations to waive any penalty. So we're in those discussions with the government. They're asking for some additional support for opposition and details. I mean it's obvious that COVID effected schedules for projects all around the world but they're asking for some more details.
We think it will get resolved in a mutually satisfactory way. But as Richard said we're also very focused on meeting our commitment to the government ultimately. We notified them that we had a 12 month away in reaching the, because of COVID reaching a deadline of December of 23 to construct the new smelter, and now we expect that that wouldn't be completed until 2024. This option that Richards referring to [indiscernible] potentially could get us back on schedule.
And we just need to make sure that it fits with from a commercial standpoint and overall business risk standpoint. But we're working closely with the government. I can say that our interests, having our partner in [indiscernible] our interests are very much aligned and we're all on the same page in terms of what we need to do and we're just working our way through the government's regulations to resolve this issue. And I'm confident we will.
Thanks Kathleen. So the outcome of the discussion with the government would that be the completion of sort of a new smelter progress schedule?
Yes. You're right. That's part of what we're discussing as a new schedule for the project and that's tied in with our discussions with them on this administrative fine.
Okay. Thank you.
Your next question comes from the line of Carlos de Alba with Morgan Stanley.
Good morning Richard and Kathleen good morning. Just following up on this smelter would you please expand a little bit more on the status of the negotiation within commercial parties maybe for a third party to do the investment in the major smelter? Are those still ongoing or have they stopped and we should now come back and think more about PT-FI doing this method on its own? And then on CapEx and it's not a big increase CapEx outlook for 2022 increase about 220 million related to other projects. Is there anything in concrete that you highlight or it's just based on the series of projects that that you elaborated on earlier in the call?
Yes. Well on the --
Let me say the last question. It's good news Carlos. Higher copper prices gives you an incentive to spend money to increase values and so these are items that were largely in our long term plans that we're advancing to create value right Kathleen.
Yes. That's exactly right. We brought forward some capital. We've also increased production. So that's what that was is basically mining equipment investments. The first part of it in terms of the negotiations and we don't publicly comment on details of the negotiations while they're still in progress. But we had all set a target of trying to get the commercial agreement with a third party done by the end of March and so there were extensive negotiations that went back and forth during the first quarter.
By the end of March we had not reached an acceptable agreement and we've been moving in parallel this other projects. At some point we've got to make a decision. We haven't finalized that decision yet but we are moving the greenfield our own project forward so that we can meet our obligations to the governments and not rely solely on a third party. So at this point we are still having some discussions with the third party but we're moving the other one in parallel as well. So as soon as we get a final decision and believe me we all want that as soon as possible we will convey that to you.
That's clear and I appreciate the caller. Thank you very much Richard and Kathleen.
Yes Carlos it's and when we talk there we say I was listening to Kathleen some of the weirdest decisions by the government. The we in Indonesia is the PT-FI which is a partnership between mine [indiscernible] and FCX. FCX operates but we in Indonesia is that partnership along with the ministry of state-owned enterprises. It's a different world from those of you who followed us for all the years we were dealing with the government when FCX had to take the lead and really me personally was there on the ground on these negotiations. Now we're there very much as a team as Kathleen says it's aligned and it's a much better environment than we had historically.
Our next question will come from the line of Orest Wowkodaw with Scotiabank.
Hi good morning. Just again a follow-up on the smelter. At some point I assume you're going to have to make a decision in terms of whether to build your own or whether to go with a third party. Is there at this point is there a drop dead date in terms of which direction that goes? I mean certainly you can't drag this on forever?
No it's a government. I mean it's really, the government's going to make that decision. We're prepared if we could get, if the government supports it and we could get a reasonable deal with constraint sale terms and a regulatory environment dealing with our IUPK obligations, PT-FI is prepared to deal with we debate. If that doesn't happen we're prepared to go forward with the other project and we're working on that. We're not sitting here not doing anything. We're prepared to go forward and I just think it's important to keep in mind that while this is a big project and it's a management issue it's not a huge financial issues FCX. I mean we were paying a 5% export duty that would be relieved with the smelter. The financial implications are not that significant and more than 70% of the financial implications go to the government through taxes and equity share ownership. So --
But Orest we do want to make a decision sooner. There is not some kind of drop dead date but we want to make this decision very soon.
Yes. Okay. Thank you. And just I was going to say it's a follow-up. Go ahead Richard.
No I'm just saying it's not like we can say we're going to do this, we're going to, it's got to be a joint decision between the government and PT-FI.
I see, okay. Is it fair to assume I mean given that benchmark or spot TC for copper are so depressed right now that in order for a third party to agree to build the smelter that it is affair to assume that they'd be looking for some kind of stability in the TCs perhaps that are at higher levels?
Yes.
Yes.
Okay.
Yes.
Okay and just a point of clarification did I hear earlier you state that you hope to be in a position to provide the market with some guidance on some of the brownfield growth opportunities in the U.S. by the end of the year? Was that correct?
That's our hope. That's our aspiration. I mean as you know we're very transparent company and our hope is that we get some clarity by the end of the year. Josh mentioned it. Kathleen mentioned it and as we do we're going to keep all of you informed.
Great. Thank you so much.
Your next question caption the line of John Tumazos, Very Independent Research.
Hey John.
Thank you very much. Good morning. Thank you for taking my call and congrats on all the money that's raining on you. Just following up on Emily's first question for the Baghdad mill project and the El Abra mill project and the Kucing Liar underground project which we know you're going to meticulously engineer and study as you plan and permit and build and finance. Is it safe to say each of those are likely to come on 2025 or later?
Yes.
Is it --
Yes. [Baghdad] could come on quicker than the other two. The long lead times for investments for KL and Kucing Liar we are that's in our long-term plans. We're just optimizing it now so that in that capital will be spent over a long period of time and then El Abra just from a sequencing standpoint would come behind Baghdad from time period that it could come online. So you're talking about if you started everything right now you're talking about seven years out with all the permitting process seven- eight years maybe all the permitting process but Baghdad could be done probably on your 2025 type timeline if we depend on when we start.
If I could ask one more I recall Kucing Liar results that were very good in the 90s how recently has that been drilled and updated. So you have access and you've updated those studies and have more information.
Yes. We have also John you'll probably remember that Kucing Liar has pyrite content and so Mark talk about how we've been working and this has been a continual work project. it is independent of Grasberg black cave Deep MLZ and our other operations but Mark maybe comment on how we've updated our analysis of KL?
Yes. I mean in the last three years or so it was a significant change wasn't so much new drilling. We did do some drilling over the last couple years and we revisited some of the metallurgical work. The big change there was and as Richard alluded to the original KL mine plan was more focused on higher copper equivalent grade but it also had much higher pyrite and required a significant change to our processing. The new mine plan focuses on some slightly lower copper equivalent portion of the resource that has now become the reserve and we've, and this part of the ore body essentially we leave the mill as it is the pyrite problem is largely diminished and almost eliminated.
So the overall capital as far as processing, power requirements, environmental management have dropped significantly in addition this new portion of the new mine plan the areas that we mined the gold recoveries go up substantially. We in our initial reserves several years ago gold recoveries were below 50% the new plan has gold recoveries over 60 and we think there's upside there. So it's a much less capital intensive, a much more robust plan, a lot less environmental management costs that go with this new KL plan. The one thing as Richard mentioned that it's independent but in some ways it does tie in. We share parts of the GBC ore flow system. KL ramps up and in coordination with the GBC plan we used some of the same conveyor and then the big part was is that the mill is relatively unchanged with this new plan.
Thanks Mark.
And so John, yes thanks Mark. So John this is not a competing project to our Americas growth plan. I mean it's in our long-term plan as Kathleen said. It fits in with everything we're doing out there and then the trade-offs of where we invest in the Americas is one where we will be looking at the pros and cons of each project. in the U.S. we have no royalties because we own the land and fee we have no taxes because of our tax loss carry forward for a very long period of time and tax rates in the U.S. are very low. So I mean, all of this this is an after tax, after royalty economic analysis, and we're going to decide where can we add value most economically for our shareholders.
I was just so happy to see it raining money and good opportunities on you.
Thanks John.
Thank you.
Long winding road but it's great.
Your next question comes from the line of Michael Dudas with VRP.
Yes, good morning.
Good morning, Richard and Kathy. I need to follow up on your thoughts on investment for Freeport. Certainly looking at after tax returns, copper price, etc. taxes how much more will ESG be involved in some of the analysis that not only you but the industry is going to have to work on to get, you thinking of adding significant hurdles generally, some obviously, you have to have a social license to operate by and we understand that. But is it because of the more important that's going to be helpful is that going to add hurdles to some of this long term investment that the industry is going to require to meet the demand needs going forward?
It's not only go it is today I mean it is today. And I mean, ESG matters are not something that's common across all projects. They're all site specific related. I made a point, I think you probably picked up on it and talking about our growth projects in Arizona being supported by communities and by native American groups. That's because we've been there for so long and we have devoted attention and resources to those communities and to providing opportunities beyond just our separate operations.
Elsewhere in Arizona even which has a favorable state view for mining development there are huge barriers from an ESG standpoint to developments and you just look at Rosemont and resolution and other projects. So you have to go and look at each particular project each the way companies have provided but it's an enormous barrier and it's going to grow.
I mean the number of groups that are involved in ESG attention you see it with institutional investors [indiscernible] were with but consumer groups are very focused. Automobile manufacturers are focused about where their minerals coming from, where's their copper coming from. That's why this copper mark thing that I referenced is so important. So it's going to be, it's an enormous issue right now and it's going to be a major impact on, it's going to be supply development. So --
Yes. And it's always been part of our project evaluation. It's even more so today but it's always been part of our evaluation is using less energy, diversifying our energy sources to looking at renewables. Water is a big issue that we manage. We found a great solution in Cerro Verde in Peru when we did that project where we built a wastewater treatment plant to get water. So we didn't compete with other uses of water in the country and actually helped the community. So we're always looking as part of our projects, how does this project help the community and ESG has always been part of it as Richard said it's just growing much larger. And I guess this, but copper is really a great story. We don't have the scope three emissions that other companies have to deal with. Copper is actually, what copper is used for is actually used for decarbonisation but the scope one and two areas is something that we work hard on every day and it's all part of our project development plans and capital investment plans.
Yes. Appreciate those thoughtful answers. Thank you.
Your next question comes from the line of Andreas Bokkenheuser with UBS.
Thank you very much. Thanks for taking my question. Just a quick operational question a two part one actually. Obviously we saw production a bit higher in Q1 versus sales. Can you just comment a little bit further about the restocking? I think you were saying also that there might be some gold sales at Glasberg that are going to get delayed into sales Q2. So what kind of drove that?
Okay. So let me address that we don't sell copper and gold in Grasberg. We sell copper concentrate. It's got copper and gold in it. We get paid for the the individual components at LME prices but as I mentioned earlier what happened at Grasberg is we met our production targets, we transported this copper concentrate to the port site to be ready to ship, some shipments got delayed for various reasons and so the production's done and we recognize sales when the concentrate's loaded on ships. So literally all we have is some of those sales are going to be in the second quarter [indiscernible] first quarter and it's just that simple and throughout our operations we have timing issues like that. For those of you who follow the Grasberg we have weather conditions at port. It's a shallow water sea and so weather conditions can delay shipments but all this will ends up being strictly a timing whether it's at the last of the first quarter or the early part of the second quarter it's irrelevant.
Okay.
Yes. Generally our production equals our sales and we did have some both in the U.S. and in Indonesia we did have some changes between production and sales but that's like Richard said just timing.
As you can imagine we can sell everything we produce. That's not an issue.
Absolutely. That's very clear and a follow-up question you've obviously been mentioning that you expect the output of the Peru, and sort of early to kind of return to normal next year are there any other mines in your global portfolios that are right now kind of feeling the pressure of any COVID restrictions or anything of that nature where you expect there could be a bit of a volume ramp up going into uh next year?
Well, we mentioned we should we restart we'd actually suspended operations at the Chino mine in New Mexico relatively small mine but we resuming operations there. We reduced mine rate stripping rates at Morenci to conserve cost and that'll take some time to restore and production will build up from there but it's nothing of real significance. The amazing thing is the guys Mark and his team at Grasberg have just done remarkable with meeting our targets there in the face of a very challenging COVID location and we've done remarkable job in managing all that and continue to.
Yes. I'd say logistically in South America is where we have the biggest constraints currently but we're still dealing with it all over in terms of protocols, etc. So we're not letting up the guard and we're continuing to be very careful about how we operate make sure people are safe but in terms of the logistical side of things it's mainly impacted South America.
Okay.
Sorry. Internal medical director. We work with international SOS for years and they've been fabulous in helping us build testing facilities and facilities for dealing with infected people. We're able to treat them get them back to work and that's an ongoing process.
Okay. That's clear. So for South America the expected plan is the ramp up happens in the second half and then you're kind of back at full run rate in early 2022. Is that the right way of thinking about it?
Well, in fact and Peru specifically our plan is to run at this reduced rate all year long and we'll assess that as we go but right now the going in assumption is that we'll be in the situation for the balance of 2021 and then go back to the plan in 2022. That's the assumption. In Chile it's a smaller operation but we are beginning to increase our mining and stacking rates there and the metal impact will happen in 2022 but we're starting that now. so but our plan at Cerro Verde which is our largest operation in South America is to be at this low, slightly lower rate in the balance of the year. The team did a great job and was able to surpass expectations in the first quarter but it's not something that we feel is prudent to assume because the restrictions are still very significant.
Okay. That's very clear. Thank you very much.
Thank you.
Your next question comes from the line of Lucas Pipes with B. Riley Securities.
Morning Richard. Kathleen thanks very much for taking my question as well. Most of my questions have been asked and answered but I wanted to circle back Richard to some of the earlier comments you made regarding this being one of the best copper markets outlooks you've seen and in light of that when we think about the framework for retaining capital versus returning capital to what extent could this be subject to review? We spend a lot of time on this call talking about organic growth for example. so could there be an incentive to toggle this ratio more towards the growth side and then along the same vein M&A -- have your views on that evolved and if so what geography could make sense? Could you be looking at producing miners or would you look pre-production would appreciate any updated thought from that as well. Thank you very much.
That's a very good multi-layered question. Let me see if I can answer it precisely. I've been around a long time and I see there's three kind of eras of copper demand. Pre-early 2000s it was all driven by develop countries GDP. Copper's most correlated commodity to GDP and it would rise and fall based on business cycles. China emerged and now for almost two decades has dominated new demand growth. It's all come from China when you look at it.
The rest of the world's kind of been flat. The new era today which is so exciting is China's rate of growth which people have been pointing to for some time inevitably is falling has to fall. COVID kind of complicated all that up but its absolute demand for copper volumes is so strong because this economy has grown and that's going to continue with even as it pivots its economy to consumers and exports it's the absolute amount of copper that it grows even though the rate of growth will drop absolute amount be strong.
Now the reason I'm so excited about now is now you've got it's COVID recovered in the developed world but also all this movement around the world you see it clearly here in the United States to push money to a broader set of people to enhance consumption. All this move towards incoming inequality which everybody recognized we got to do and that's going to create new copper demand and then my long-term story's always been in the undeveloped world, global growth all the vast numbers of people around the world that are living in substandard conditions have aspirations of having better conditions that requires more energy, more transportation, communication, more copper.
So that's why I say the demand side to me is in a new era and it's really positive and the supply side I don't know how it's going to keep up with it. I literally don't. Here we have all of these projects at Freeport the price of copper could double overnight. Some people talk about it doubling anyway but overnight and we couldn't add new production of significance for a number of years. So it's going to be really interesting to see prices I just unless there's some global calamity prices it just seems to me clearly have to rise substantially. Substitution has to occur. Scrap has to grow but how to meet that demand and that's why I'm so thrilled about where we are after all this time working to put this company together. John Tamazo's referenced it I mean we have been through so much but I recall Kathleen and I developed a strategy in 2003-2004 when I became CEO of focusing on copper and now it's so great here all these years later to see it coming to fruition.
Very helpful so.
And in terms of the M&A question we're really focused on our existing assets. We've got development options within the portfolio. We always monitor what's available externally and compare that against what we have.
Let me add just a personal observation on that. Our company made a mistake, misstep other mining companies made missteps when they forced M&A for strategic reasons. You just look over and over again. South side came to us as an opportunity. It wasn't a strategic plan to do it. We had talked with them about buying us. So where we are now is we have no strategy of engaging in M&A markets but we will be positioned now for the first time in a long-long time to -- if an opportunity come to us comes to us to take advantage of us.
Our strategy is straightforward; execute, invest in a disciplined way in our resources that provide growth, that create value. If something comes to us we're going to be in a position to consider it but that's not our strategic objective. You mentioned startup operations and those come to us all the time but we have trouble. It's been a big barrier to make the economics of those work because to get into it you've got to pay the value that's been created already.
When we have all these other resources in our portfolio where there is no value being given to them in our share price. So we see that's been a real barrier of making even what might be at some level interesting projects work economically for our company and we've had a long saying in Freeport big minds get bigger and smaller minds get smaller. So that's also a tough issue.
Richard, Kathleen thank you very much for the color and continued best of luck.
Your next question comes from the line of Jatinder Goel with Exane BNP Paribas.
Good morning and good afternoon. Thank you for taking the question. Just one on smelter. To get a bit more clarity is it only one party that you are engaging with on potentially outsourcing the smelter or are there multi-parties? The reason for asking you might have seen a news release or a media article last week that Indonesia has signed MoU with ENFI and that's in West Papua where people were said to have committed to 800,000 tons of raw material as well which doesn't seem to align with the full scale of smelters. So not sure if you're looking at just one smelter one party or are there multiple elements to it. Thank you.
Yes. The discussions today has been most extensive with the project at [indiscernible] The project that you're referring to is in Papua potential project and we are familiar with the developer there and have indicated that if there is excess capacity we may be able to supply but our options right now are focused on the base supply, are focused on either this [indiscernible] option or our project at Gresik.
In response to your comment we've made no commitment for supply on the Papua project. For years we would have liked to have seen a smelter developed in Papua because we, it would be desirable to help the local community there but the infrastructure cost, the absence of infrastructure, the timing investment that would be required for infrastructure have made it impracticable in the past.
That's very clear. Thank you so much.
Our final question will occur from the line of Brian MacArthur with Raymond James.
Good morning. Hi how are you today?
Hi Brian.
I'd like to go back and talk a little bit about KL because finally after years it's getting closer but it does sound like the project as per John's comment has changed. So I just want to try and understand a little bit because when you look at the grade of this it's point the reserve grades whatever 0.9 copper and 0.9 grams per tonne gold. So it's a little more gold than some of the others.
So in this new plan I guess my first question is you talked about certain areas of the ore body. Is there an area that's higher grade which you start which helps the economics and my second question it sounds like the new plan obviously saves CapEx which is good, technically probably is easier which is good but then you talk about lower copper equivalency. So I'm trying to figure out just how much lower that copper equivalency is and secondary that obviously that depends on price assumptions too. So I'm trying to [indiscernible] pretty good.
Yes. We will let Mark talk about it but there is a section of the mine that and we did the same thing with the Glasberg block cave development. We modified it over time to focus on the lowest pyrite sections and what Mark will tell you is that with KL we redesigned the mine plan to reduce the capital intensity because in order to get the pyrite there is more capital in the mill, more environmental management required and the recovery starts going down. You mentioned the 0.9 but it has a very low recovery in some of the ore.
So what we have developed here is a more optimal plan that reduces upfront CapEx and modestly changes the total ore but from a metal standpoint you're actually ending up with similar metal because you've got higher recoveries. So Mark you want to add –
Just we will turn to Mark but it's not that complicated. It's we've designed a new mine plan to avoid and minimize the pyrite section. So and by doing that we reduced mill investments plus there was going to have to be a pipeline you've been out there you -- a pipeline from the mill down the lowlands of storage for pyrite and low and so Mark it's more of a engineering design determination which gets all these economic benefits than anything else. Mark?
Yes. And I think the major advance was understanding where the not necessarily the highest grade but where the highest value after capital investment was in the ore body and if not for having a debt our contract with the government goes up to 2041 if not for that the material that we've deferred would also be in reserves.
So what we've done in this new plan is brought forward. There is about half of the old reserve that overlaps with the old reserve and then there's another half where we've deferred a part of the lower value ore and been able to substitute it with higher value ore.
This ore that we're now mining would be sediment hosted very similar to what we've milled for years in the DOZ, Deep MLZ, the old reserve was very much centered on this fault that the highest grades but as Richard and Kathleen mentioned some of the bigger challenges were a new mill, we had to grind it much finer. That came with additional power requirements and then we had to manage the pyrite which for us is to segregate it from the [MOD ADA] and store it separately.
So by recognizing all the costs that are associated with some of the higher copper equivalent grade that's a combination of the copper and gold value and substitute it with looking more on a value rather than purely on copper equivalency, we came up with a much more optimal sequencing of the mine with the opportunity to go after this other material at a later date if we had the opportunity to mine beyond 2041.
And it's more reduced risk, more robust plan and we're doing some things right now to continue to try to enhance those gold recoveries.
And can you with this new plan and I forget what the original rate you figured KL was going to go through it can you actually offset the higher mining rate because I think you still have mill capacity at 240,000 tons too right? Does that offset it in or is it still sort of the same rate there?
It's very similar mining rates that we had before the tonnage is similar. It's a little bit less because we start a little bit later but this does fill the 240,000 tons of mill capacity that we'll have with the SAG-3 and so there is a obviously a district-wide plan that we sequence all of the ore bodies to best fill that mill in an optimal fashion. This would peak at 90,000 tons a day just marginally above what we're planning to do with the Deep MLZ and it ramps up as GBC would start to drop off and so it's a balancing of the highest value material getting the first opportunity for mill space.
Great. Thank you very much. That's very helpful and it certainly sounds like it's a much more profit risk adjusted capital intensity project than maybe it was thought of 15 years ago when we first looked at this I guess.
Yes, that's correct. Exactly right.
Thank you very much.
Thanks Brian.
Now I'll turn the call over to management for any closing remarks.
240,000 tons a day from the underground operation. I'll just leave it with that. Thank you so much for being on our call and we look forward to continuing to report our progress as we go forward in this year and following years. Thank you.
Ladies and gentlemen that concludes our call for today. Thank you for your participation and you may now disconnect.