Freeport-McMoRan Inc
NYSE:FCX
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Freeport-McMoRan Inc
Earnings Call Analysis
Q3-2023 Analysis
Freeport-McMoRan Inc
In the third quarter of 2023, Freeport-McMoRan reported noteworthy operational performance in spite of various global challenges affecting the industry. The company's success is attributed to its effective team that has consistently demonstrated the capability to navigate complexities across varied locations worldwide.
Freeport-McMoRan is undertaking a project costing roughly $1 billion that aims to significantly reduce PT-FI's greenhouse gas emissions by around 60% compared to the 2018 baseline. The economic rationale for this project also includes avoiding costs associated with refurbishing and expanding existing coal units, bringing the incremental economic cost to approximately $400 million. Additionally, the company has secured a new agreement in Peru, ensuring 100% renewable power for Cerro Verde by 2026.
The company maintains a strong balance sheet and has demonstrated robust financial flexibility, having already returned over $3.5 billion to shareholders through dividends and share repurchases. While current market conditions require careful monitoring, Freeport-McMoRan plans to manage the timing of its projects without compromising its financial health. Their experienced team continues to focus on long-term value creation while managing operations responsibly and efficiently.
Freeport-McMoRan acknowledges the impact of inflation on the industry and recognizes the necessity to adjust historical views on copper prices accordingly. The company is particularly mindful of the inflation in capital costs which is considerable and seems to be persistent. As a result, the company is re-evaluating the economics of potential projects such as El-Abra, considering both capital costs and the timing of execution. The current copper prices are deemed insufficient to justify major investments, so the company plans to explore opportunities through innovation and automation to increase production without significant capital expenditure.
Freeport-McMoRan is actively addressing the high inflation environment by seeking cost efficiencies and productivity improvements across operations, rather than simply transferring the cost increases downstream. The emphasis is on multiple initiatives to combat the inflationary pressures, banking on the concerted efforts currently in progress by the company.
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Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoran's Third Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Quirk, President. Please go ahead, ma'am.
Thank you, and good morning. Welcome to our conference call. Earlier this morning, FCX reported our third quarter 2023 operating and financial results, and a copy of the 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, certain of our comments on the call include forward-looking statements, and actual results may differ materially. I'd like to refer everyone to the cautionary language included in our press release and the presentation materials and to the risk factors described in our SEC filings.
On the call today is Richard Adkerson, our Chairman and CEO; Maree Robertson, our Chief Financial Officer; Mark Johnson, Chief Operating Officer for Indonesia, Josh Olmsted, the Chief Operating Officer for the Americas; Mike Kendrick, who heads our Molybdenum business, Cory Stevens, who leads our Technical services and Engineering and Construction Group; and Steve Higgins, our Chief Administrative Officer.
We're going to start with Richard. He'll make some opening comments, and then we'll be reviewing the slide materials, and then we'll open up the call for your questions. Go ahead, Richard.
Thanks, Kathleen. As Kathleen said, she's going to review our operations and financial results for the third quarter. Big picture, we had very strong operations performance. And this was really notable in the face of a number of challenges we faced at different locations around the world. Once again, TeamReport answered the bell and remained true. Stating the obvious is a complicated geopolitical and macroeconomic world. Freeport family around the world is sad for the 4 people in Israel and Gaza and in the Ukraine and praying for a resolution to those conflicts.
Macroeconomic factors with higher interest rates are negative for the price of copper and Freeport's equity. It goes without saying, our business by design, by strategy is correlated to the price of copper. In response to the recent lower copper prices, we are supported by having a strong balance sheet, which we're committed to maintaining and by having the ability to manage our capital cost and operations to be responsive to the price environment. We remain very confident about the long-term outlook for copper and for our company's equity. The current situation does nothing but bolster the longer-term outlook for copper prices as a commodity and for our future returns to Freeport's shareholders.
We look forward to answering your questions, and I'll turn the call over to Kathleen to review our results.
Thank you, Richard, and I'm going to start on Slide 3, where we summarize our key operating and financial highlights for the third quarter. We delivered another quarter of strong execution. Production results across the portfolio were solid, totaling 1.1 billion pounds of copper and over 500,000 ounces of gold during the quarter. Our copper sales were 8% above our estimates going into the quarter. And despite strong gold production, our third quarter gold shipments were slightly below previous estimates that reflected timing associated with some administrative approvals in Indonesia, but this is expected to turn and set up for higher gold sales in the fourth quarter.
Our unit net cash costs on a consolidated basis averaged $1.73 per pound in the third quarter that was similar to the year ago quarter. The increase compared to our guidance of $1.61 per pound largely reflects the impact of export duties in Indonesia, which we continue to review and discuss with the Indonesian government. With average copper prices of $3.80 per pound in the quarter, we generated EBITDA of $2.2 billion. Our operating cash flows, which were net of $500 million in working capital uses totaled $1.2 billion, and those exceeded our mining capital expenditures totaling $800 million, which excludes capital associated with our smelter project, totaling $400 million in the quarter, and that's being funded from proceeds that we raised last year in a financing transaction.
We're making steady progress on the smelter projects in Indonesia. The construction project on the new greenfield smelter is 84% complete, and we're on track to begin ramping up during 2024. Richard talked about our balance sheet, our balance sheet, liquidity, financial flexibility remain in great shape. Excluding the net debt associated with the smelter projects in Indonesia, we ended the quarter with $800 million in net debt.
As we approach the end of 2023, our team remains focused on continuing strong and safe execution of our operating plans and we expect to have another quarter of strong production results, and we're going to continue to advance several important initiatives to drive long-term value in our business.
Moving to the next slide, Slide 4. We talk about copper markets. And as Richard mentioned, the long-term fundamental outlook for copper remains compelling, characterized by rising demand associated with global investments in electrification and limited supplies. In the short term, copper prices have been impacted by macro sentiment tied to rising interest rates, U.S. dollar strength and settlement on the global economy.
Copper inventories on exchanges have risen in recent weeks, and that follows a multiyear period of declines. When we look at the overall inventories on the exchanges, they remain low by historical standards and in relation to the growing size of the market. The reality on the ground, when we look at the macro sentiment, we also need to look at the reality on the ground. And the new structural demand drivers for copper are mitigating traditional cyclical uses.
In the U.S., several of our customers are reporting growth in power cable and building wire for utilities and data centers and rising demand from the automotive sector. There are pockets of weakness tied to residential housing, but this is being offset in other sectors. China's consumption continues to grow despite the country's weak property sector, supported by massive investments in wind and solar and growth in electric vehicle production. And the recent signs we're seeing that economic activity is picking up in China.
We're also seeing growth in copper consumption in India, which has historically used less copper per catheter than other countries. We can't predict short-term macro forces that have heavily influenced the market, but our conviction for the long-term fundamental outlook remains strong. Copper is the metal when it comes to electrification and Freeport is well positioned as a leader in the global copper industry.
When we look at the long term, we're looking at the next several years where demand is expected to accelerate with third-party projections for demand to double by 2035. At the same time, the ability of the copper industry to meet this rising demand is a major challenge. The recent weakness in price, combined with higher capital costs to develop new mines, are making it more difficult to justify new project development, which is essential to the future. With this backdrop, we believe the current price is not sustainable and prices will need to rise to incentivize new supplies.
At Freeport, we benefit from a large reserve position and an even larger resource position to grow our business in the future. We're going to take a long-term view and also be mindful of the short-term pressures on the market.
Moving to the next slide on Slide 5. We want to highlight some of the key operational drivers for our business during the quarter. In the U.S., our leach innovation initiatives, where we're deploying new operating practices to traditional leaching, is showing tangible progress. Incremental copper from these incentives totaled 46 million pounds in the third quarter. This is 90% of our initial target run rate of 200 million pounds of copper per annum.
We see ongoing opportunities for additional scale as we aggressively advance this highly valuable initiative. Additionally, we're continuing to focus on enhancing productivity in our U.S. mining and milling operations. We know there's opportunity here to improve, and it's a key focus area for us.
At Cerro Verde in Peru, where we operate 1 of the largest concentrate sites in the world, the mill averaged over 430,000 tons per day during the quarter, that was a new quarterly record. You recall this is a site that was designed at 360,000 tons per day. Over time, our team has found ways to improve efficiencies there. I'm really proud of the Cerro Verde team.
At Grasberg, our mill rates averaged 207,000 tons per day for the quarter, processing high grades of copper and gold ore. The production for the quarter exceeded 400 million pounds of copper and over 500,000 ounces of gold. That was in a single quarter, demonstrating the size and scale of this operation. We had several days of the mill throughput in excess of 220,000 tons per day. And a highlight of the quarter was the performance of Grasberg Block Cave. We mined from that ore body over 130,000 tons per day on average. We installed a new garatory crusher at the Grasberg Block Cave, which gives us the ability to process more material from that large order body, and we recently reached new records of over 160,000 tons a day. We're working to complete the new SAG mill at Grasberg. We're expected to complete construction by the end of the year, and that will give us more opportunities in the future to ramp up our mill rate even further.
Turning to Slide 6. We talk about our growth initiatives. And as we look at the situation where we have growing demand for copper over the next several years, and the limitations and the high capital intensity and risk for greenfield projects, our strategy is really focused on development of extensions of our existing operations and our portfolio of brownfield opportunity. We characterize our growth in near term, medium-term and longer-term development options.
On the near-term side, the initial target of 200 million pounds per year of copper from our leach initiative has essentially been met. And now we're focusing on sustaining it and scaling it further. On prior calls, we discussed our initiatives to retain more heat in the stockpiles and those activities are continuing. A big driver of the success in the last several months has been on our leach everywhere work where we're applying solutions to areas of the stockpile, which have not previously been leased. We're also conducting targeted drilling to inject solution to areas within the stockpile where solutions may have been blocked over time. And our data and modeling can now provide information that target specific areas of opportunity, and we're gearing up to do this more at scale.
We now believe we can scale these activities and double the incremental copper to 400 million pounds per annum over time. This is just from applying our operating practices at a larger scale without relying on new technologies. We're also continuing our work on the new technologies front, and that's going to give us the opportunity with success to reach our ultimate goal of 800 million pounds per annum from this initiative over the next 3 to 5 years. Remind everybody, we have 40 billion pounds of copper in our stockpiles that's already been mined. This is not in our reserves, and it's an opportunity for us to get recoveries from this copper that previously was thought to be waste material. This initiative has the best economics of anything in our portfolio given its low capital intensity and low incremental operating costs, and we're pursuing it very aggressively.
Our productivities in the U.S., which I mentioned earlier, are focused on rebuilding the experience of our workforce. We've had a large number of new hires in recent years, and we need to rebuild our skills and experience, enhancing our practices to achieve better equipment performance and reliability and taking advantage of new technologies and automation to restore and improve on productivity metrics that weakened during the pandemic. By increasing our productivity in the U.S., we have the opportunity to add an additional 200 million pounds per year from our existing assets with limited capital investment.
We're also continuing our work on potential expansion of the Bagdad mine in Northwest Arizona. We're completing a feasibility study, and we're taking some steps now to enhance optionality for the future, including making some investments in autonomous haulage in our mining operations at Bagdad and we're advancing investments in our tailings infrastructure for the future. We are setting up Bagdad expansion project as an option for the future. The timing of it will depend on market conditions. We're looking at the increased capital cost requirements for projects and we'll consider that. We're also looking at the availability of labor and we'll make all those reviews before finalizing our decision on the timing of this project. But it's a very large resource for us. We've got significant reserves spanning over 80 years there and a good opportunity for expansion in the future at the right time.
We also have a major opportunity for expansion at our El Abra mine in Chile. This is a very large resource that could support a concentrator on the size of the concentrator we added at Cerro Verde several years ago. We're retesting the economics to update project capital costs in light of the recent capital cost experience and other large projects. And in parallel, we are planning investments in water infrastructure to support the current operation and provide optionality for the future. Again, this is about options for expansion at the right time, and we've got the portfolio with a lot of option value within the Freeport portfolio.
Our Kucing Liar development in Grasberg is proceeding on schedule. We expect to commence production by 2030. A huge, huge ore body ramping up to 550 million pounds of copper and 560,000 ounces of gold in next decade. We're also conducting some additional exploration in the Grasberg district, where we have identified some potential below our Deep MLZ ore body. We're continuing to advance discussions in Indonesia for extension beyond 2041. That would open the door for continuation of large-scale mining and potential additional development options in 1 of the world's largest and highest grade copper and gold mining districts.
Longer term, we're focused on a major opportunity that we have in the U.S. at the Safford/Lone Star District. We've identified a significant resource there, and we continue to see the Safford District with the potential to add another cornerstone asset of scale in the U.S. We're in an outstanding position as we look at our large resource and reserve position and the experience of our team to continue our leadership role in supplying copper to a world with growing requirements. We're going to continue to be disciplined in our approach, and we're going to be focused on executing projects where we can create value for shareholders.
Slide 7 provides our 3-year outlook for sales volumes. You'll see this is largely unchanged from our prior forecast. We've increased our 2023 copper sales volumes by about 40 million pounds, and that reflects the updated shipping schedules expected in Indonesia. There is no material changes in guidance for '24 or '25. We do believe we have some upside to these numbers with continued success in our leach efforts and our work on productivity enhancements in the U.S.
We're -- turning to our regional data on Slide 8. We show our projected 2023 volumes and unit net cash cost by region. The Americas, including North America and South America, comprise about 63% of our 2023 copper sales and all of our molybdenum sales. Indonesia represents 37% of our copper sales and all of our gold sales. The Americas volumes are similar to prior forecasts, and our sales estimates from Indonesia have been increased to reflect the shipping schedules as I mentioned earlier.
On a consolidated basis, our unit net cash costs for the year are forecast at $1.63 per pound. It's slightly above the forecast -- prior forecast of $1.55, $0.07 of that relates to export duties, which remain under discussion with the Indonesian government. We've also incorporated some higher costs for energy compared with the prior forecast. And after moderating in the first half of the year, we're seeing energy costs, particularly for diesel fuel, rising. We're continuing to work to enhance productivity to mitigate the cost increases we've experienced since 2022, really across the board for labor. Our contract maintenance services, equipment component costs and a series of input costs that have risen and we're working hard to try to mitigate those through effective cost management and productivity enhancements.
Turning to cash flows on Slide 9. We model our results for EBITDA and cash flow for 2024 and 2025, showing a price range of $4 to $5 copper. We've got sensitivities on the page, so you can use for looking at the changes based on changes in input costs or copper prices. The annual EBITDA would range under these scenarios from nearly $10 billion per annum at $4 copper to $14 billion at $5 copper and operating cash flows would range from $7 billion to $10 billion under these assumptions.
With long life reserves and large-scale production, we're well positioned to benefit from future metals intensive growth, and that will provide opportunities for organic investments and cash returns under our performance-based payout framework.
On Slide 10, we show our current forecast for capital expenditures for '23 and '24, $3.2 billion total for 2023 is similar to our prior estimate. And our capital for 2024 is $3.9 billion compared with the prior estimate of $3.8 billion. For 2024, we've added some discretionary capital to commence a new project in Indonesia to transition our energy source from coal to cleaner LNG over the next 3 to 4 years, and we expect to start that project next year.
The discretionary projects total less than $2 billion over '23 and '24. This category reflects the capital investments we're making in new projects that under our financial policy are funded with a 50% of available cash that's not distributed. We've got some details on those projects in the reference materials.
Slide 7 -- I mean, excuse me, Slide 11, we've included some updated pictures of the smelter project in Indonesia. This is a major undertaking. It's being executed very efficiently. We're making steady progress toward completion. For the greenfield smelter, we're now 84% complete on construction and we expect to begin commissioning the project by the middle of next year and ramping up to full production by the end of the year. We're also nearing completion of an expansion project that we're doing with our partner to expand the existing smelter in Indonesia. We expect construction to be completed by the end of this year in 2023.
We're really pleased with the strong execution of our internal project team and our outside contractor to contain costs and meet schedules in a very complex environment for major project development.
On Slide 12, I just wanted to update you on some climate initiatives. We published an updated climate report during the third quarter, which is available on our website. But I mentioned in Indonesia, we're advancing plans to develop the transition or coal to LNG. We have plans to develop a 265-megawatt gas-fired combined cycle facility and that would replace the coal units that were developed there over 25 years ago. The project has a cost of roughly $1 billion and the economics, as we looked at it, would eliminate the cost to refurbish and expand the existing coal units over time. So the incremental economic cost of this project is roughly $400 million.
Importantly, the transition would reduce significantly PT-FI's greenhouse gas emissions. And together with other initiatives, PT-FI's undertaken the total reduction would be on the order of 60% compared to the 2018 baseline. So it's a very exciting project for us looking forward.
We're also very pleased to report that we have a new power purchase agreement in Peru at Cerro Verde that will allow Cerro Verde the benefit of 100% of its power from renewable sources in 2026.
And finally, on Slide 13, we wanted to reiterate the financial policy priorities centered on a strong balance sheet, cash returns to shareholders and investments in value-enhancing growth projects. The balance sheet is strong. We've got strong credit metrics, significant flexibility within our debt targets to execute on our projects. Same time, we've distributed over $3.5 billion to shareholders through dividends and share purchases. And we have an attractive future long-term portfolio that will enable us to continue to build long-term value for shareholders.
We've got to continue to focus on the current situation, though, and we're going to continue to monitor current market conditions. We'll carefully manage the timing of our projects to ensure our financial flexibility remains strong. And our team has really experienced in navigating challenging conditions while maintaining a focus on pursuing long-term value in the business and executing our plans responsibly, safely and efficiently.
That concludes our prepared remarks, and we appreciate all your attention and interest, and we'll now take your questions.
[Operator Instructions] The first question will come from the line of Alex Hacking with Citi.
Richard and Kathleen, I wanted to ask a couple of questions on U.S. operations. Could you maybe discuss the cost performance there? That seems like it's a little bit higher than guidance. And how you see that going forward? And then secondly, just on production, just so I understand. Production this quarter is about 340 million pounds. Does that include the incremental 46 million pounds from the new leaching? Is that all in the U.S.? And I guess, if so, that sort of implies that production without those pounds would be below $300 million versus like $370 million last year. So maybe just some comments around that and how you see the leaching impacting the production profile there going forward?
Thanks, Alex. I mean your question is right in terms of the performance in the U.S. of the base business. We're continuing to experience challenges on productivity. We've got -- we've been hiring people. We've got a lot of new people in our workforce. And so we're very focused on improving the productivity in the U.S. We're focused on maintenance. We've had some challenges with premature failures and some maintenance challenges that we're getting caught up on. We've also had a lot of increased costs related to component parts. We've had some increases in the cost of labor, particularly contract labor. You've probably seen all the activity in Arizona with -- outside of copper with a lot of investment in various industries. It's a very competitive market.
So the cost rises in North America have been higher than what we've experienced elsewhere. Of course, we've also had the benefit in international locations of a stronger dollar, which offset some of the labor cost impact. So you see that more in the U.S. But you're right that without the leach pounds, the incremental leach pounds, that we accomplished year-to-date, we would have had lower production. And what we need to do is really get both of those flywheels going at the same time, because the more we place and we've been missing some of our placements in terms of the mining rates and the placements on the leach piles, the more opportunity we have to get more out of it through these leach initiatives.
So it's a big focus of Josh and our whole team to really work on getting productivity up. If you look at grades, we're in a period right now at Morenci, where we've got low grades and a hallmark of Freeport has been to manage costs very well given the low grades we have. But we've got to work our way through that and get our flywheel moving again to get productivity up.
In terms of the leach pounds and the impact on cost, what really needs to happen with the leach project to really start seeing the impact on unit cost is enough confidence to be able to increase our reserves. And that will allow us to essentially, in the financial results, see lower unit costs as we add reserves, and we're spreading cost over a larger number of pounds, that economy of scale will start to come through. So the more confidence we get in this, the more we're able to actually put these opportunities into reserves and have enough confidence to do that, that's when you'll start to see the impact on the net unit cash cost. But I don't know if that was a long answer, but did that answer your question?
Yes. That was a great answer, Kathleen. I really appreciate all the color good luck with everything.
Your next question comes from the line of Chris LaFemina with Jefferies.
I just wanted to ask about El Abra, which has tremendous potential, you've talked about it for a long time to build a big mill project there. With the clarity now around Chilean mining taxes, I would assume that's helpful. And also, I'm not sure if you've looked into the recent double taxation treaty, which I think for U.S. companies makes Chile potentially more attractive investment. So wondering, first, kind of how you're thinking about that now? And what we can sort of expect if you do progress in this project in terms of timing, capital cost, scale? And then maybe as importantly, your partner's ability to help fund whatever you develop there, because I assume it's going to be capital-intensive project. I'm not sure Codelco has the capital to contribute alongside you with this. So how should we think about that? And again, does that double taxation treaty between Chile and the U.S. affect the economics of this project to potentially drive an investment decision?
Thanks, Chris. Both of those items that you mentioned, the recent clarity around taxation in Chile and the issue between the treaty between the U.S. and Chile are both helpful. Quite frankly, if that hadn't been resolved, the latter had not been resolved, that would have posed a big challenge for us in developing the project, but that's been resolved. And so now we're really turning to the economic side of the equation. And we've been watching what's been going on in Chile with other major projects. We did a lot of work on this project on the El Abra project, and it has good economics, but we want to retest those economics with current capital costs.
And that will be something that we're going to be -- we've already started working on, but that's something we really want to get our heads around is, does it make sense, what's the timing given rising capital costs. I mean, you've seen really the significant cost blowouts in Chile in recent time. And we want to make sure that we can deploy capital effectively, efficiently in this market. And as Richard was talking about, the copper price today doesn't really support new investment and so -- of significance. And so our focus really has been in this kind of environment on what we can do to be less capital intensive while continuing to advance our options and create optionality in the portfolio.
We're -- our plans in Chile currently are to invest in some water infrastructure, desalinization, a project that would allow us to extend the life of the current operation, and then that would give us optionality for the bigger expansion. And so what we're really doing now is trying to advance these things, so we have optionality, but we're not wanting to commit to major, major multibillion-dollar projects in the current environment. We all see this looming deficit coming, but current prices just don't support big new investments like this at the current time.
We know that will change over time, and we want to be prepared at the right time to bring this project on. Permitting takes quite a while and Chile is on trying to streamline permitting. We're encouraged by that.
In terms of the Codelco question on financing, they're very positive about the project, and they've indicated to us support for it at the right time. And we'll figure out financing this at the right time when we go forward. But right now, we don't have to make that decision.
Your next question will come from the line of Michael Dudas with Vertical Research.
Following up on some of the other questions. I get the sense that access to labor contracting, rising interest rates, raising the hurdle rates for capital investment. Do you think that this has pushed out whatever expectations of maybe Freeport's longer-term or medium-term investments or the industry's investments given these dynamics, especially the copper price, which as you indicated, I think everybody agrees, wouldn't support this type of investment?
Richard, do you want to take that one?
Sure. I think there's no question about it, Mike. This as I said, our revenues and those of other copper producers are correlated to prices. As I talk with a lot of people, and I was just last week, I was with a group of senators and congressmen in Washington night before last. With the new cost structure, people's historical views of copper prices need to be adjusted. I mean at 1 point $3.50 or $4 copper price was considered to be a very strong price, but with the effects of inflation it is not the same. And so you have to look at both of those together. And then the thing that's really striking to us, and you can see this in a number of other projects by companies around the world is that capital cost inflation is significant and persistent.
You can see from our own numbers, particularly when diesel costs dropped earlier, they've ticked up again some, but I thought we had good performance with our operating cost measures. But then when you get into this issue of major projects, the capital costs are really significant. We really are motivated to invest because we have such strong conviction about the future of copper prices. But at the same time, history has taught us that it's best to be prudent in the way we commit capital. You might -- could incrementally improve returns if you were more aggressive near term, but we retain all these projects. We don't lose the opportunity. But we and I believe others are going to be prudent until they see how this current situation around the world with China and inflation and Central Bank's activities and now we've got the increasingly complication of geopolitical events going on.
And that's why I made my comment at the outset that this does nothing but bolster the future supply deficit that the industry is facing. So it's a 2-edged sword. We'd like to go forward, but we've concluded it's best to be prudent. And with the industry, I believe others will as well. And that just means that supplies are going to be limited for the future at the time when copper demand will be growing.
It sounds like discretion is the better part of the hour.
Your next question comes from the line of Orest Wowkodaw with Scotiabank.
Wondering if you could share any expected time line for reaching any kind of conclusion in Indonesia with respect to the new export royalty rates and potentially the life extension there beyond '41?
Well, the issue on the -- you talked about the duty situation there is that, as you are aware, our IUPK says that we're not subject to duties once the smelter gets over 50%. And the government issued some new regulations earlier this year, and this not just applies to Freeport, but all exporters for copper that are required to have smelters that were required to pay a 7.5% duty. And it's a sliding scale depending on how much progress you've made. We have raised the issue with the government. And they are reviewing the issue, they're also reviewing our progress of the smelter, and we're going to continue to work cooperatively with them.
I want to just remind everyone that there's alignment of interest to a large degree there because Indonesian government state-owned company owns 51% of PT-FI and also PT-FI pays taxes. So the impact to the government of these export duties is also a significant item. So we've got support from our partner there to help us work through this issue with the government and we're going to continue to -- I don't have a definitive time line, but we're continuing to engage in discussions to address this.
The extension discussions are also continuing. Our partner, Mind ID is also very supportive of extending the operation. One of the really significant benefits that we've had in the new structure since 2018, where the government owns 51%, is there is a better understanding of the time it takes to develop new resources or extend the resources. And so I think all the parties are aligned in that it makes sense to continue this operation beyond 2041. We made a lot of progress in developing a framework with the government on what the terms of that extension would be.
A big catalyst for us is getting the smelter -- getting the smelter advanced and completed. And that would -- I think, would be a good catalyst for us to be able to continue to extend those operations out for the life of this resource. But conversations are ongoing. Indonesia is in an election cycle now. And so there are other things going on in the government. The government has a lot of priorities that they're balancing. But in terms of the want to and will of getting this extended to be able to continue the benefits that are very significant to the government of Indonesia and the people of Papua. There is good support for doing this, and we're working very hard to try to get it done as soon as possible, but the time line is not under our control.
Your next question comes from the line of Carlos De Alba with Morgan Stanley.
So the question I have is really on the discussion is on the Indonesian funding -- the Indonesia project funding. Just to revisit your smelter is now being paid by proceeds from the PT-FI senior notes and the revolving credit line. I just wanted to see if that is something that will continue as it is right now. And what about the funding for the other CapEx projects, KL, another expansion of the -- like the crusher and the new SAG mill there. Is that going to also be paid by these senior notes and the internal cash flow generation? Or do you expect your noncontrolling partners to contribute cash for those projects? And then maybe associated with this is, how should we think about the dividends paid to noncontrolling interest going forward?
With respect to your question on the first topic, the smelter project is being debt financed. And so we raised $3 billion in financing last year and long-term bond financing at the PT-FI level. So the economics of that, even though it's consolidated on FCX's financial statements, the economics essentially are borne by shareholders. And we have a revolving credit facility as well to supplement that. So the smelter, and that's why we look at it separately, it doesn't impact the cash flow we have at the FCX level that's available for distribution, because it's being funded through these proceeds.
With respect to other capital projects at PT-FI, those are funded internally at the PT-FI level. So when we look at the projects we're doing to complete the new SAG mill when we look at the copper cleaner project, all of the capital projects at PT-FI, those are funded with that subsidiaries internally generated cash flows, which is very significant. And so yes, as you increase capital there, it does -- it does reduce the dividends that come out of PT-FI, but these are really good projects that PT-FI has the ability to fund with its cash flows and distribute substantial amounts to its shareholders.
In terms of the dividends there, that's really a function of what the performance of the business is. We have a policy, a dividend policy at the PT-FI level, where all of the available cash flow is distributed to shareholders and FCX gets 49% of that and Mind ID gets 51%. But that's the policy that we're following and expect to continue to follow.
Your next question will come from the line of Bill Peterson with JPMorgan.
Nice job in execution given all the challenges out there. My first question is actually a bigger picture question tied in to an earlier question. So if you take into account this broader inflationary environment, increased project financing cost, I guess where does pricing need to be and how sustained does that need to be for Freeport and maybe even the industry if you want to comment on that? But specifically for Freeport, to support projects such as Bagdad expansion or El Abra as examples?
Well, we're updating our capital cost now for El Abra. Previously when we ran the economics several years ago, it's been a few years ago before the pandemic when we outlined the potential for the project, today's price would have worked fine. It would have been a good return. But there were other factors that led us to put the project on hold. In today's world, we need to retest those economics. I mean, you just look at the recent project in Chile of how much that cost increased, and it's a huge multibillion dollar impact, and that impacts our thinking and that impacts economics.
So we don't think -- we know the economics we ran previously don't apply currently. And so we've been doing some work. We've been doing some additional work on the resource, and we've got some positive things that have developed since then that will help the economics, but this capital cost inflation is a real issue, and it's something that we need to keep in mind.
On the Bagdad project, this is a project that with El Abra, these are new reserves. So with El Abra, it would allow us to produce the reserves currently in the ground where we don't currently have infrastructure that can produce those reserves. At El Abra, I mean at Bagdad, it's a different analysis. At Bagdad, we can produce those reserves over 80 years or we can double our processing capacity and produce those reserves over a shorter period of time. And so you have to look at the capital cost and how that interplays with it being an acceleration of production rather than new production.
So we're looking -- we're completing the feasibility study. The costs, we believe we're going to come in higher than what we expected them to. And so that will have an impact on us. The other thing that will have an impact on our decision will be the availability of labor and whether we can execute that project efficiently. We're doing some things now to create options. We've got the autonomous plans to put in autonomous haulage at Bagdad. It's our first mine in the U.S. that will do that, and that's exciting for us, and that creates options for us in the future. And we're doing some work, some early works to give us options there, but the numbers don't work.
I think if you ask people in the industry, what it takes, people are going to tell you it's over $4 to develop new projects, but every project is different. And that's why when we look at this leach opportunity, the potential to add 800 million pounds of copper with very low capital costs is very compelling. And so we're going to be looking for opportunities in the near term during this uncertainty to expand our production, but it's going to be through innovation, automation, rather than high capital intensity. And we'll continue to test that and that will continue to evolve. But that's the current thinking is that right now, the copper price is not enough to support a major investment and a big expansion or a greenfield project.
Well understood. I guess just on the second question on working capital. So how should we think about the cadence of working capital through the balance of the year, given exports and now resumed Indonesia. Are you still expecting a slight use for the year?
Yes, it's a use, but we expect some of that will turn in the fourth quarter, some of what we had in terms of the inventories and receivables will turn, but we are expecting a use for the year.
Let me just add 1 quick -- Regina, let me just add 1 quick comment to support what Kathleen is saying. People -- and I understand it if you're doing overall industry analysis, you're looking for what is the incentive price that triggers new production. But Kathleen made the point that each project is different. And then each company's situation is different. One of the strong things about our business is that because of our production levels, our resource base, our ability to add to production with things like leaching, but beyond that more -- with being more efficient with technology, working our assets harder and so forth, we don't face the same pressures from reinvestment risk that some of the companies face, but also other commodity space because of shorter reserve life.
And that's 1 thing I like so much about our business is that it gives us that flexibility to not have to take risk, not have to press things during uncertain economic times, but as I mentioned earlier, to be just more prudent about how we run our business. It's a great strength of our industry to a certain degree, but at Freeport as a company because of our strong production base and long-life properties and the ability to maximize production out of our existing properties by doing things smarter and using technology and working assets harder.
Our next question will come from the line of Alex Terentiew with Stifel.
Just 2 quick questions for me. First, I just wanted to follow up some of the comments here on Indonesia with the smelter export duty. Any changes -- latest changes in the regulations that would change your view on whether you expect the export duty to go to 0 once the smelter is built? And then the second question, just circling back on the leach expansion, 800 million pounds over -- if you can get there in 3 to 5 years, I mean, that's pretty impressive number. I just wanted to get some more details from you, if I could, just on the cost for that. I mean the U.S. operations have been running around, call it, $3.70 a pound or so. Is that a fair cost for us for this as well? Or I mean, would the operating cost be higher but lower -- much lower capital cost? I'm just trying to get a sense of what the upside is for that sort of potential.
Yes. On the duty issue, the duties are paid on concentrate exports. So once we get the smelter done and ramped up, we will have no more exports of concentrates. We'll be producing copper cathode and gold, the actual metals. So the export duty only applies to this intermediate step of concentrates. So there hasn't been anything in terms of -- we're still working with the government right now, the export license is through May and so we've still got to work with the government to work through this issue beyond May of having a ramp-up period.
We'll still be shipping some concentrates, exporting some concentrates during the ramp-up. But we're going to work cooperatively with the government to make sure that those -- that continuity continues. With respect to the leach pounds, not every application is the same. But on average, we expect these leach pounds to come in at roughly $1 per pound. And so that is -- that's why we're so excited. Most of this is is in our U.S. business. And so it will bring down, if we're successful, and we're able to put this into our reserves, it will bring down our average cost in the U.S. over time. And I'll just ask Cory Stevens is on the line, and he and his team are leading this initiative. And just wanted to ask Cory, if there's anything that we didn't cover on leaching that you want to make points of that hasn't been discussed so far.
Yes. Kathleen, I guess the 1 thing I would just add or maybe just emphasize some of the momentum that's been able to be built around this effort, really around these executable known technologies has been significant. And so we've been building quarter-over-quarter, and now we've got line of sight to the $200 million, but really the portfolio gives us sustainability going forward into the future and build this foundation that I can see it significantly building from there. And then you've got a whole other portfolio of innovation work, whether it's additives or alternate flow sheets or really leveraging temperature at that next level that the team is really excited about. So super focused on disciplined execution that the team is super energized and looking forward to the future.
Yes. And so there's a lot of value in this opportunity. And we see it, we can feel it and we're pressing forward. But as we talked about earlier, we've got to get that going. At the same time, we get our productivity, our key performance indicators improved in the U.S. And that's a big focus as well. So those 2 things we believe will generate a lot of that value in our U.S. business, and it's not capital intensive. So that's really our primary focus right now is on getting those 2 things going at the same time. And we've made great progress on the leach front. We're making progress on the productivity initiative front, but we've got more work to do there.
Those are impressive numbers on the production and the cost front. So best of luck to you and your team.
Your final question will come from the line of Brian MacArthur with Raymond James.
My question just goes back to the export duty. The $147 million you incurred this quarter, 2 things. I assume that going retroactive back to March 29 when it technically with scaled down, so you're sort of paying 2 quarters? And the second thing is talked about incurring it. Have you actually paid it on a cash basis? Or is it just a payable as you kind of work through all this?
It was a go-forward duty. So it wasn't based on retroactive, so go-forward duty and 7.5% of the exports values were assessed. Some of it's been paid, some of it's not been paid. And there's a process in Indonesia where just like any other process where you have disputed amounts or amounts that you're objecting to, you can go through accounting purposes, given just the uncertainty of how it would all play out. We have accrued those costs. And so we've expensed those as we go. If it gets resolved, that will get -- favorably and it will get reversed. But at this point, we're accruing for these costs pending the ultimate outcome.
Great. And just to be clear, last quarter -- yes, I'll follow up with David, because just last quarter, the export duties were 0 on the cost per pound. So that's what I'm just trying to figure out exactly how this is working.
Yes.
Just remember, Brian, we weren't exporting for a fairly substantial period of time there. while we had this administrative delay for even having any exports, and that's when our inventory built up so much. We're able to sell it down. But we went for, what was it, Kathleen, about 6 weeks with for -- and so the duties -- the duty is paid when it's export.
Yes. The new regulation didn't come out to June and July time frame. And so in the second quarter, we didn't have duties. It was this June 10 date that triggered some new regulations. So we didn't -- you're right that we didn't have duties in the second quarter. So the duties that you're seeing in the third quarter relate to the third quarter shipments.
Great. That's very clear. And you Richard, that's very helpful as well.
With that, we'll turn the call over to management for any closing remarks.
Well, thanks, everyone, for your participation, and we're available if anybody has any questions or comments, and just talk to David, and we'll look forward to continuing to report to you on our progress.
Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.