Freeport-McMoRan Inc
NYSE:FCX
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Freeport-McMoRan Inc
Earnings Call Analysis
Q4-2023 Analysis
Freeport-McMoRan Inc
The company showcased an exceptional fourth quarter in Indonesia with mining output surpassing the previous year by 8% and copper and gold production over 20% higher than last year’s fourth quarter. This performance is part of a broader success story rooted in decades of preparation, marked by the recent completion of a new SAG mill installation at PT-FI, and forging ahead as the world's largest and one of the most cost-efficient underground mining complexes, producing both copper and gold. The market for copper seems promising as demand remains strong, particularly noted in China's robust consumption for infrastructure and electric vehicles, setting the stage for potential tight market conditions due to a combination of strong demand and supply disruptions that have pulled anticipated market deficits into 2024.
The company is advancing a set of strategic initiatives aimed at scaling leaching operations to potentially reach 800 million pounds of copper per annum with low capital intensity and carbon footprint. A particular focus in the Americas lies on optimizing production from operational improvement projects and expanding the reserve position, aiming for 400 million pounds of incremental copper per annum without significant investment needs. Additionally, the completion of the feasibility study for expanding the Bagdad operation in Arizona was achieved with a focus on enhancing future optionality despite a higher-than-historical capital expenditure projection, driven by current market realities and inclusive of benefits such as lower tax burdens in the U.S. compared to international locations.
Looking into 2024, the company maintains a commitment to safe and reliable operations, with a keen eye on performance enhancement and optionality for growth. The projected copper sales volumes for 2024 are slightly lower than previous estimates, and gold sales are expected to rise by 10% higher than earlier projections. Capital expenditures for 2024 have been revised downward from previous forecasts, reflecting a disciplined approach to capital management. The company reasserts its financial policies centered on a strong balance sheet, strategic cash returns to shareholders, and value-enhancing growth projects, backed by strong credit ratings and a history of successful large-scale project executions.
The leadership believes the fundamentals supporting copper demand remain unchanged, particularly with copper’s essential role in global economic developments and the company has taken strides over the past year to fortify its position for the future, implementing a strategy not to react defensively to short-term copper price fluctuations but to focus on embracing opportunities that enhance long-term shareholder value,.
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Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Fourth 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 the Freeport-McMoRan conference call. Earlier this morning, we reported our fourth quarter and full year 2023 operating and financial results, and a copy of today's press release, the supplemental schedules and slides are available on our website at fcx.com. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page 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, I'd like to remind everyone, today's press release and certain of our comments on the call include non-GAAP measures and forward-looking statements and that 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 SEC filings.
Also on the call with me today are Richard Adkerson, our Chairman and CEO; Maree Robertson, our Chief Financial Officer; Josh Olmsted, our COO of the Americas; Mark Johnson, Operating Officer for Indonesia; Mike Kendrick, who runs our Molybdenum business; and Steve Higgins, who's our Chief Administrative Officer. We'll start the call with some opening comments from Richard and then we'll go through the slide presentation materials and then open up the call for questions.
So I'll turn it over to Richard.
Okay. Good morning, everyone. As you can see, our first quarter was really a sound quarter and outstanding in several respects in terms of our operations. It was really led by PT-FI during the whole year of 2023. We began our ramp-up in 2019 of the Underground and now we are fully operationally and the team has been setting records consistently out there and I just outperformed for the full year and faces some really challenges, which is just part of that business. But I'm very proud of our PT-FI team at [ jobsite ] in Jakarta.
We are making great progress in fulfilling our 2018 commitment to the government to invest in downstreaming and the copper concentrate business. In December, I was there for the inauguration of the expansion of the older smelter, PT Smelting, was present Joko Widodo, and that was a good event. And then with our new smelter at Manyar in Eastern Java, we reached an important 90% milestone at the end of the year, and we're progressing for physical completion of the smelter and ramping it up on schedule in 2024.
A couple of words about the markets. It continues to be the micro versus macro story. Notably, in 2023, the macro factors strengthen notably, 2023 had long been forecasted to be a year of surplus because of new mines coming on stream, but it ended up being a small deficit and at the same time, there were stronger-than-expected demand for copper in the United States and in China in spite all the issues of China's property business, other sectors created notable growth for copper in China.
Then there were the supply shortfalls throughout the industry for some significant mines and these for range of factors that are kind of coming to our business. The copper business -- mining business is a tough business, but it was political issues in some countries, community issues and then operating issues. As a result of all that, inventories of copper around the world are at historically low levels and the inventory levels are really inconsistent with the current copper price. The copper price clearly been driven by macroeconomic factors. The currency, the strong U.S. dollar carryover effects of inflation, government fiscal policies. And there are concerns about economies in China and Europe. But if the macro outlook -- and I'll just say when the macro outlook crews watch out for the copper price.
Looking ahead, the world is going to need significantly more copper in the future for a variety of factors. The world is becoming increasingly electrified, and that's what copper is used for. And it's at a time when the industry is simply investing to grow production, that the outlook indicates that will be required for economic, operational and resource nationalism, a series of factors, but the facts are there's an outlook for strong demand and supply challenges. That's why I'm so personally confident about where Freeport is positioned and pleased with it.
We have high-volume existing production that's sustainable. We have large sustainable reserves and resources. We have growth opportunities that we will pursue prudently from this really exciting leaching initiatives that Kathleen will be talking about and from brownfield expansions of our existing ore bodies.
Before turning over to Kathleen, I just want to send a note of condolences to our friends at Rio Tinto. You may have seen the news, but they had a [indiscernible] to go down in Canada heading to their diamond operations there. Rio has been a special part of Freeport's history, of course, through our partners for many years at Grasberg. I've worked with 6, 7, 8 CEOs of my career, some of my closest colleagues have been with that company. And the toughest part of being a CEO is to lose people in and I'm just so sad to hear this news and the whole Freeport families -- heart goes out to our friends at Rio.
With that, Kathleen, I'll turn it over to you.
Okay. Thank you, Richard, and I'll be covering the presentation materials, starting with Slide 3.
Our achievements for 2023 are summarized here. Our sharp focus on executing our plans in an effective, safe and responsible manner, managing the controllable drivers and navigating challenges successfully all translated into solid operating results over the year. A big highlight for the year was the outstanding progress in Indonesia, where we grew production levels for the fourth year in a row. We posted several new operating records and we continue to enhance values for this large-scale, low-cost and long log resource.
We were also successful in reaching several milestones during the year, including our -- reaching our target run rate for incremental leach production in the Americas, enhancing optionality in the Americas for our brownfield growth projects and reaching our targeted 90% completion milestone for the Indonesian smelter project by the end of 2023.
As a leader in the industry, we were one of the first companies to have all of our operating sites certified under the Copper and Molybdenum Marks, and this demonstrates our performance and commitment to responsible mining practices. We ended the year 2023 in a strong financial position, a positive outlook and as we work together to enhance long-term value for shareholders.
On Slide 4, we summarize the key results for 2023 compared with historical levels. After growing our volumes from 2020 to 2021 and 2022, we were able to [ see ] production of copper in 2023 despite a challenging environment for copper supplies Richard discussed, and we reported another year of growth in gold production. Our unit net cash costs for 2023 were above the 2022 level as expected, but they came in very close to our original guidance for the year. We're continuing to actively manage costs and productivity initiatives to address cost inflation, and we'll be working on that as we go forward.
For the year 2023, we generated strong EBITDA of $8.8 billion and operating cash flows of over $5 billion. We're continuing to carefully manage not only our operating costs but also capital expenditures with a priority on spending on projects to sustain production, improve efficiencies and enhance optionality for future development options with attractive rates of return.
During 2023, we returned $860 million to shareholders, bringing the total shareholder returns to $3.8 billion since we implemented our performance-based payout framework in 2021. We ended the year with net debt of approximately $800 million, and that excludes the [indiscernible] related debt, which is being financed separately.
I was going to move to Slide 5 and talk about the fourth quarter. During the fourth quarter, our sales were 3% above our estimates going into the quarter. Our gold production was also very strong, but our shipments have grown in the fourth quarter was slightly below the previous estimates, and that reflected timing in these shipments we made in the first quarter. Unit net cash cost averaged $1.52 per pound in the fourth quarter, that was better than our guidance of $1.58 per pound and slightly below the year ago period. Notably, unit net cash costs Indonesia were 0 in the fourth quarter, $0.00 per pound, meaning our gold credits completely offset the production cost for copper.
Average capital realizations in the fourth quarter were $3.81 per pound, and we generated $2.3 billion in EBITDA and operating cash flows of $1.3 billion.
If you go around the world and talk a little bit about our various operations in the fourth quarter. In the U.S., we made progress in increasing our mining rates. That's been a big focus during the quarter with a 9% increase over the year ago quarter. We have a continued focus on improving our asset efficiencies and workforce experience levels. These are important initiatives as we seek to increase productivities to combat lower ore grades. Our innovative leach initiatives met expectations and also helped to mitigate the impact of lower ore grades in the U.S.
Labor market conditions in the U.S. continue to be tight. We're taking steps to expand housing options in our remote locations for recruiting and retention, and we're also continuing to pursue technology solutions to enhance productivity. Conversion of the Bagdad truck fleet to fully autonomous is advancing, and we're targeting to commence the transition in the second half of next year.
In South America, our ore milled was sustained above 400,000 metric tons per day, and our ore stacking rates increased at a lot.
Mill recoveries at Cerro Verde in the fourth quarter of 2023 were below year ago level because of the material types that we're mining in the fourth quarter. This is continuing for mining phases in early 2024, and we're working to optimize performance.
As Richard discussed, the fourth quarter performance in Indonesia was exceptional. Underground ore mined averaged over 214,000 tons per day, and that was 8% higher than the year ago period combined with strong wage and recoveries, our copper and gold production in the fourth quarter was over 20% higher than last year's fourth quarter.
We completed the installation of a new SAG mill at PT-FI in December, and that will provide additional opportunities for us going forward. And the team is just doing outstanding work, sustaining and optimizing value from this large resource position.
We thought it's good to look back in history of how the underground transition has gone Slide 6 covers this. We show a history of the progression of the transition. As Richard mentioned, we stopped mining from the surface in the Grasberg open pit at the end of 2019, transition to fully underground operations beginning in 2020. We have a long history in Indonesia, spanning over 56 years and a great track record for building value over many years for all stakeholders.
We're extremely proud of the team's execution, our transition. We now have the world's largest underground mining complex, and it's been developed in a modern, efficient operation. The Grasberg is the world's second largest copper mine and one of the largest gold mines even though gold is a byproduct. High grades of both copper and gold make it one of the lowest cost operations in the world as well. This took a lot of planning. We began planning for this underground era over 25 years ago and commenced development activities in 2004. And as you can see from the graph, the project is performing exceptionally well and generating strong margins and cash flows.
As we look forward, we're continuing to make investments in this resource to enhance value and sustain long-term performance. We're working on the extension of our operating rights beyond 2041 and increasingly confident about securing our long-term rights. And that would extend the lives of our resources and open a whole new set of opportunities for this district.
Richard touched on the smelter progress, and this is really important for us in terms of securing long-term rights. We reached 2 important milestones on these initiatives in 2023. The projects include a new greenfield smelter in East Java, and the expansion of our nearby existing smelter, which was developed in the late 1990s. Richard mentioned, we celebrated in December, the completion of the expansion project with the Indonesian government and our Japanese partner.
And we also reached a really important milestone on progress of the greenfield project with completion progress achieving the target we set with the government of over 90% by the end of December. We posted a video this morning on our website that shows the Greenfield Smelter project. You can see all the progress that's been made and you can see the sheer size and scale of this impressive facility, and I hope you'll have a chance to look at it.
Both projects have been executed very efficiently in the context of a challenging market for major project development. The internal team that we have working on this project, together with our contractor, have done an outstanding job containing costs and maintaining schedules. We're working to complete the construction by the end of May of 2024 and to start commissioning and conduct the ramp-up period over the balance of 2024. This is a big deal for us. It's not very frequent that you see new smelters starting up, and we've done a lot of planning going into the start-up process. Our teams are well paired and really highly motivated to achieve a safe, efficient and timely start-up in 2024.
Turning to the U.S. and the Americas where we've got an important leach initiative ongoing, we achieved our targeted run rate where we were targeting approximately 200 million pounds of copper per year by the end of 2023. This is an exciting and innovative initiative involving new operating practices being applied to our traditional leach operations and really working to get more out of our massive stockpiles that contain material that has in place in prior years.
Look, remember, as we've talked about on prior calls, the cost of this incremental cost of production is lower from both an operating and capital perspective because we're targeting material where the material has already been mined, and we're largely using existing infrastructure to extract the new metal.
The first phase of this initiative essentially involved 4 basic categories of actions: One, as we've talked about previously, we commenced the process to install coverage over the stockpiles to increase heat retention and drive higher recoveries. Two, we gained access to areas in the stockpiles that have not previously had the benefit of leach solution and this initiative we call Leach Everywhere. Three, we started using drilling techniques to specifically target areas within the stockpile where solution was lacking. And importantly, the fourth area is developing more sophisticated models using data analytics to optimize the application of solutions to improve performance and using this data as a valuable tool in getting work in all the areas of initiatives in this important program.
As we look at where the impacts came from, you can see most of the incremental production was from our Morenci mine. That mine has a very long history of leaching operations. We have a massive set of stockpiles there and a very large opportunity set at Morenci. As we go to Phase 2 of the project, where we are working to essentially double the initial target from 200 million pounds to 400, we really are looking at just scaling these practices further. And by continuing to scale the operating practices, we think we can double the initial target over the next 2 to 3 years. And as we continue to work to sustain the production we can add to our reserve position, and that's a real focus of ours, to capitalize the progress into long-term reserve additions.
The first and second phase of this initiative is really operationally driven using existing technologies. The third phase, which is also very exciting is really the work that we and others are doing to advance the leaching process using different additives and different techniques and this is more of an R&D effort, but it's being advanced. We're commencing a large-scale testing activity to evaluate the response to new additives and we're also evaluating opportunities to get more heat retention in our stockpiles and heat really is an enabler of more copper production and higher recoveries.
In aggregate, these initiatives have the potential to reach 800 million pounds per annum, and that's equivalent to a large-scale copper mine. And notably, it's got very low capital intensity, and we've seen how much -- how much new copper mines cost. This is a very low capital intensity, low incremental operating costs and a low carbon footprint. The value potential here is very attractive, particularly for a company like Freeport to take advantage of given our large quantities of suitable material that we previously mined.
Richard touched on copper markets earlier, and we have some information on Slide 9. Physical markets have continued to tighten, inventories have declined and demand is growing. Despite the weak sentiment over the last several quarters on the Chinese economy and property sector, the reality is that China's copper consumption was strong throughout 2023. And this reflected the intensity of copper use and energy infrastructure, renewables and electric vehicles.
In the U.S., our customers continue to report solid demand for copper with growth in several sectors.
At the same time, supply disruption increased meaningfully in recent months. In total, near-term supplies of copper have been reduced by over 700,000 tons in a very short period of time. The market was previously expecting that 2024 would be a small surplus market and turning to deficit beginning in 2025 time frame and continuing for some time. With the recent supply disruptions and continued demand growth, the deficit market has been advanced into 2024, setting up for tight market conditions in the near term.
While the fundamentals have become significantly more positive, macro conditions tied to U.S. dollar strength and sentiment about China have influenced copper price movements. Richard mentioned, we believe the fundamentals of the market will lead to significantly higher copper prices in the future, and that's supported by anticipated strong growth in demand associated with secular trends and the global economy's requirements for copper. Also, the realities of the cost and time frames required for new supply development is an important factor when we look at the fundamental outlook for copper.
Turning into how Freeport is positioning to try to grow production in response to this market demand, really look at the sizable on Slide 10. We really look at the sizable reserve position of copper and even larger resource position that Freeport has that supports a pipeline for future growth options. Within the portfolio, we look for opportunities to get more out of what we have through innovation and operating efficiencies. We look for investments and projects, so we have large resource positions and where we have established track records and opportunities to launch the existing infrastructure, our people and capabilities, all with the drive focus on increasing value.
We categorized on Slide 10, our near-term, medium-term and longer-term development options. And we've outlined identified projects totaling about 1.7 billion pounds of copper in the Americas. And we've also highlighted on the slide the ongoing development of the [indiscernible] project in Indonesia which is expected to support long-term production profiles in the Grasberg District.
The opportunities that are shown on the slide in the 2- to 3-year category, they center around scaling our rich initiatives and achieving incremental production from our operational improvement projects. Together, the potential from these opportunities total 400 million pounds of incremental copper per annum and do not require significant investment or long lead times. We discussed earlier that the leach projects, but we're also dedicating significant resources to enhancing productivity and asset efficiencies, rebuilding the experience of our workforce given the large number of new hires in recent years and utilizing new technologies and automation to restore and improve on productivity metrics that weakened somewhat during the pandemic.
As we indicated, we completed the feasibility study late in the year 2023, to evaluate a project to more than double the size of our bad debt operation in Northwest Arizona. The reserves at Bagdad are span for decades, and they support expansion of infrastructure at the site to bring value forward. The incremental capital cost to build a new concentrator and support infrastructure for significantly higher mining and milling rates is on the order of $3.5 billion and an expanded operation would not only substantially increase copper production but would produce economies of scale and reduce unit costs.
The project does not require major permitting and it's relatively straightforward. But given the tight labor market conditions and general market factors, we're not making a decision right now on the timing of the project. We'll continue to evaluate the timing of when we would go forward. But we are taking steps now to enhance optionality for the future by making some investments in the autonomous haulage for our mining operations, making some investments in housing, and also advancing investments in the tailings infrastructure that will put us in a position when we make the decision, we could get the project online within a few years.
In Chile, at [ Alava ], we talked about this. Our resource is very large. We have a major opportunity to install a new concentrator on the size of -- on the order of magnitude size of the concentrator we added at Cerro Verde in 2015.
We'll continue to work to retest the economics and updating our project capital costs in light of recent capital cost experience of other large projects and in parallel, we're starting work in preparation for an environmental impact statement that would give us the ability to advance the project and provide optionality for future development. We mentioned Cucina development project in the Grasberg district, which we've initiated development on. This is a multiyear development project, and it's proceeding on schedule, and we expect to commenced production by 2030, ramping up to over 500 million pounds of copper and over 500,000 ounces of gold.
We're also conducting additional exploration in the Grasberg district, where we have identified potential -- we've got a big potential below our deep MLZ ore body and we expect to have additional opportunities in the future at Grasberg.
We have a major opportunity in the U.S. at the Safford/Lone Star District. We've identified a significant resource there. This year, we're going to work to complete metallurgical testing and mine planning and start our prefeasibility study to assess future development options there. We continue to see this district as one that has big potential and potentially being a cornerstone asset in the U.S. on adjacent to the Morenci operations.
In Indonesia, we're focused on this extension of our rights beyond 2041, because that would open up a substantial opportunity for reserve and resource expansion and a continuation of the large-scale mining in one of the world's largest and highest grade copper and gold mining districts.
We're in a really strong position 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 focused on executing projects where we can create value to shareholders.
With a lot of history in developing big projects, we included a slide on Page 11 that you can take a look at a key strength of our company is the ability to execute projects successfully. This does not come easy. It requires a focused hands-on approach and we've got a business model of pairing internal resources with trusted contractors, and that has served us well. We've listed several projects that we've led over the years, and we've developed very complex projects around the world. We're going to continue to approach future projects with the same level of preparedness rigor and a focus on execution.
As we look at 2024, turning to Slide 12, we've got our focus area is listed here. And first and foremost, we remain committed to safe and reliable execution of our operating plans across the global business. Seems like a simple thing, but this involves discipline and hard work day in and day out. We discussed our focus on enhancing performance in the U.S. through our leach initiatives and productivity. This is particularly important to mitigate low grades and to manage costs, which experienced higher inflation in recent years.
We're going to have another big year in Indonesia. A key priority for us is to complete the smelter and ramp up safely and efficiently and to finalize an agreement for extension of our long-term operating rights. We're also very focused on enhancing optionality, definition and the value of our embedded growth options.
On Slide 13, we show, as usual, we show a 3-year outlook for sales volumes of copper, gold and molybdenum. For 2024, the copper sales volumes are slightly reduced, less than 2% below our prior estimate and are now expected to be similar to 2023 levels. The gold sales are 10% higher than our prior estimate and higher than they were in 2023. Buyer sales in Indonesia for the year of 2024 offset by slightly lower sales from the Americas. In 2025, our sales estimates are similar to the prior estimates and we've added 2026 estimates, what you can see are slightly above the 2025 levels. For 2024, we currently estimate our consolidated unit costs to approximate [ $1.60 ] per pound. We've got some details in the reference materials. I believe, on Page 30 that you can look at the composition of those costs but $1.60 very similar to what we had in in 2023.
On Slide 14, we put together our projected volumes and cost projections, and we model the results for our EBITDA and cash flow at various copper prices ranging from $4 to $5 copper. These models use the average of 2025 and 2026 and our current volume estimates and our cost estimates and holding gold flat at roughly current levels of $2,000 per ounce and live in them flat at $19 per pound.
And you can see here on the charts that annual EBITDA in these periods would range from $10 billion per annum at $4 copper to over $14 billion per year at $5 copper and operating cash flows under these price scenarios to range from $7 billion to over $10 billion. And we've got sensitivities to the various commodities on the right-hand side of the chart, really well positioned with a lot of lot reserves, large-scale production. We not only have current exposure to copper, but all of our future projects and growth opportunities are well positioned to benefit from future metals intensive growth, and this will give us the ability to generate returns on projects and enhance cash returns under our performance-based payout framework.
Turning to the capital expenditures. On Slide 15, we show our current forecast for '24 and '25. We should also show where we ended up for '23, which totaled $3.1 billion, and that was slightly lower than what we had guided to in October of $3.2 billion and capital for 2024 is currently forecast of approximately $3.6 billion compared with $3.9 billion preciously.
We -- the 2025 estimates that are new here are currently estimated to total $3.8 billion. That includes $1.2 billion in discretionary growth projects, which totaled $2.4 billion over the 2024 and 2025 years. This category reflects the capital investments we're making in new projects, to generate returns that under our financial policy are funded with 50% of available cash that's not distributed. They're value-enhancing projects that are detailed in the reference materials on Slide 33.
We're going to continue to be very disciplined around capital expenditures, carefully managing those. You saw we -- we adjusted the capital expenditures down for 2024. And as we go forward, we'll continue to look at opportunities to do things to sustain our business and to do things on a low capital intensity basis.
And finally, before we take your questions, we -- just on Slide 16, we reiterate our financial policies, and those are prioritized centered on a strong balance sheet, cash returns to shareholders and investments in value-enhancing growth projects.
Balance sheet is solid. We've got strong credit metrics and a lot of flexibility within our debt targets to execute on our projects. You may have seen that Moody's upgraded our credit rating in December, and that just demonstrates our strong financial profile. Indicated on the slide, we've distributed almost $4 billion to shareholders through dividends and share purchases since the payout framework was implemented in the second half of 2021 and we have an attractive future long-term portfolio that will enable us to continue to build value, long-term value for shareholders.
The global team as we go forward is really highly focused on our strategy of being foremost in titer, and we're driven to continue pursuing long-term value in the business and executing our plans responsibly, safely and efficiently.
And I want to thank everybody for their attention, and we'll now take your questions.
[Operator Instructions] Our first question comes from the line of Alex Hacking with Citi.
And Richard, I guess my question is around Bagdad and the technical study. Now I was a little surprised by how high the CapEx was $3.5 billion or an incremental 100,000 tons, about $35,000 a ton. I mean, in your view, is that the new normal for a concentrate project? Or are there particular factors the fact that are raising the CapEx above [ historical ] levels?
Thank you, Alex. I think it is somewhat of a new normal for the cost of a concentrator and related mining infrastructure. The -- when you do -- you're dividing on the cost per ton, you're looking at how many pounds of copper are going to come out of that concentrator. And our U.S. mines are characterized by relatively low ore grades. And Bagdad has relatively low copper ore grades but also has molybdenum kicker. So molybdenum would add something like 10 million pounds of molybdenum with an expansion. So that will be another benefit.
But really, what we need to do is focus on -- it does bring down our overall cost per pound. So that's a big plus for us. When you look at an investment in the U.S., it may be to develop a relatively low grade mine, but something important to point out is that we don't have the tax burden in the U.S. that you have in the international location. So I think our projects in the U.S., while they're low grade, when you cut through all the economics and you look at the ability for us to -- to execute the projects and look at the risk associated with them -- the different than looking at a project in a different location. So there's some pluses or minuses that go into the bottom line. But -- we started this work on Bagdad some time ago, and we've updated all of the capital costs in line with where current capital costs are.
And so I think a reality of the market is that the incentive price to develop new copper, even if it's brownfield, is much higher than it has been in the past. And that's another reason why we believe that the markets that they need, these copper units are going to have to adjust to the incentive prices required to get these projects going because we don't want to front-run the market. We want to be prepared, we want to be have options to go forward as soon as we can, but we don't want to be in a position where we're investing in making major capital commitments before the market prices are telling us already.
Yes, Alex. Let me just add very brief very briefly that Kathleen makes a really good point about these relative economics. No royalties in the U.S., U.S. tax rate is much lower -- federal tax rates much lower than outside the U.S. We have a net operating loss carryforward. Community support is strong in the U.S. and we have no minority interest there. So looking at global benchmarks needs to be adjusted for the site-specific factors that we have in the U.S., and they're very positive.
Your next question comes from the line of Carlos De Alba with Morgan Stanley.
Question is on cost. The -- I just want to see if you can provide a little bit more color? The guidance for the first quarter of net unit cash cost of $1.55 per pound, look, look, very, very good relative to consensus stations and our own estimate. However, for the full year, the guidance came at $1.60, and that is a little bit higher than the market -- than again, consensus and our model suggests. What are you expecting? What the viability in this were you surprised in -- at the beginning of the year then maybe throughout the rest of the quarters is increasing. What is driving that? And to what extent this number for the year is conservative?
The -- in terms of the first quarter, we do have some gold that was not shipped in the fourth quarter that will be shipped in the first quarter. And so the relative gold-to-copper ratio impacts the first quarter and makes that less than what we expect the average to be for the full year.
I don't know what Carlos, what you had in there for export duties, but we're assuming in Indonesia that those are continuing. We are continuing to discuss with the government of Indonesia, the applicability of those duties. And I think the more that we make progress on the smelter the better our case there is. But that we factored into the estimate, but we are continuing to have that discussion. So if we are successful in reducing those duties, that would be a benefit.
All right. And just to clarify this, Kathleen. The cash cost guidance for the year of [indiscernible] includes that the duties in Indonesia concentrate exports remain throughout the entire of the year, right, the full year?
Yes. Our export -- it only applies to export volumes. And so as we go through the year, the exports will decline because we'll be ramping up the smelter. So our goal for 2024 is to get the full ramp-up completed. And so that's not something that will continue long term the duties once we get the smelter up and running. But it will start to decline over the course of the second half as we ramp up and we produce more domestically.
Your next question comes from the line of Christopher LaFemina with Jefferies.
Richard and Kathleen, I wanted to ask about the kind of cost trends in the -- in North America, in particular, at Morenci. So I know that you're guiding to a slight increase in your site production delivery costs in 2024. And I assume that is a function of [indiscernible] being lower. But if we think about kind of where this business could be headed assuming that Morenci can kind of get back to where it was 12 or 18 months ago. And I'm not sure if that's a good assumption, but let's assume that to be the case. With the leaching ramp up with the staffing and productivity improvements within technologies and potentially even longer term with the Bagdad expansion, where could that kind of site production and delivery cost number trend down to? Could it get back to [indiscernible] or lower? Or is $3 a pound sort of the new normal for that business?
Well, we hope it's not the -- Chris. We're working hard. I mean one of the things that you've got to take into account here is we are in a low grade period in the U.S. I think the grades that we had in -- in 2023 were the lowest that they had been in probably 10 years or so or more. So we are in a period, and that's continued to '24 where we do have some low grade that we're going through. But that is why it's so important for us to bring on units with a lower incremental cost and the leach opportunity will help us there.
And as we are able to get those pounds put into reserves longer term, not just what you're mining that year or getting that year, but multiyear reserve additions for the leach that spreads the cost -- all the costs over more reserves. And so it does help us with driving the economies of scale and why it's so important.
We're not in a position now to say where costs could go. There's been a number of other factors that have inflation factors and things like the cost of basic parts and materials and supplies has gone up from where it was just 2 or 3 years ago. But we are very focused on it. And -- all of these self-help things for us have very high rates of return. There's not a lot of capital involved. It's focused resources. It's not -- not an easy thing because it would have been done already, but it is an area we think we can make improvements.
We can also focus, which we're doing now on the last couple of years, we've had to rely more on contractors because of the staffing issues but as we get staffing set up and get more experience in the workforce, we can reduce our reliance on contractors, as you probably know, have gotten expensive, and in Arizona is a very competitive market.
So -- we're working on all those things within the things that we have within our control and are really going to be focused on trying to drive the cost down.
We're also looking at Morenci specifically at different configurations. We're looking at whether it makes sense for us to be operating all of our equipment like we are today and looking at if we cut back some things would that be the cost and benefits to that because that could have volume impacts as well. But is that a better setup, a more efficient setup that will allow us to drive costs lower.
So we've got some of those initiatives that are -- they are being reviewed right now on what the right setup is given how costs have risen.
Your next question comes from the line of Orest Wowkodaw with Scotiabank.
Given the cost -- the capital costs involved and the timing of building new projects, and the strength of your balance sheet. I'm just wondering whether M&A of producing assets is something that's on the radar because it certainly seems like there could be some assets available out there, especially in jurisdictions or not currently in?
Well, we're constantly monitoring the market and you can be confident that opportunities are available are presented to us, and we consider them. The facts are -- we haven't found those attractive today. We have such great opportunities to create value totally for our shareholders by focusing on internal growth to the leach project through the brownfield developments in the Americas through the Kucing Liar project in Indonesia and now with the expectation that we'll go beyond 2041, we're going to do additional exploration there to understand what the opportunities are.
Success in any of those opportunities creates value where there's no value in our current share price. So it's all for the best of our shareholders. And that makes it much more difficult for external opportunities to compete with them. And my experience has shown that small mines get smaller and big mines get bigger. So we really are -- as I said in my opening comments, pleased about where Freeport is positioned for what we believe is going to be a great future for our company.
Your next question comes from the line of [ Edward Goldsmith ] with Deutsche Bank.
Two questions from my side. So firstly, can you give an update on the status of the negotiations over a concentrate export extension post May? And secondly, can you outline the reductions to the 2024 CapEx? I think they were the discretionary and the other CapEx bucket level.
Yes. On the first part of the question, our current export license in Indonesia goes to May of 2024. And we are continually having discussions with the government of Indonesia about the fact that while we will be substantially complete on construction activities by the end of May, which is -- was really important target for us and for them that just the ordinary course of a [indiscernible] start-up, it takes 5 or 6 months to get through. And so we're having those discussions. They understand the situation and they're encouraging us to continue to meet our targets and that those discussions will continue.
[indiscernible] that the alignment that we have with the 51% ownership of the state-owned company mined ID in PT-FI's operations is really important here. That, combined with tax revenues, et cetera, that the government gets from having consistent operations at PT-FI is we're both aligned in that to get -- to have exports continue. So the conversations have been constructive to date, but we've just got to -- we've got to continue to progress it. And have those -- continuing to have the discussions with the government, and we're doing that on a regular basis.
Well. Kathleen, just let me add. They're not negotiations over this issue. The mine -- I mean I've spoken in recent months on at least 3 occasions directly with the President about it. He understands it, the Mines Minister who has the business background clearly understands it. It's just administrative procedurally, they concluded not to grant that export rights beyond this date to see if we complete the smelter as we've committed to do it. But beyond that, it will be just be an administrative action to get it approved.
On the second question with respect to capital expenditures. We always go through a process of looking for opportunities to put out capital if it's not required in the current year, and we went through a process between the last update on this one to really look hard at what we could efficiently spend this year and cut back on some things. Some of that showing up in 2025. We'll do the same thing again because really what we want to do is deploy the capital as efficiently as we can and make sure we're sustaining the reliability of our operations, but also looking at -- we don't want to be doing too many things at one time. And so we always take a hard look at it. So we'll continue to do that as we go forward and manage the capital very carefully.
But there wasn't really one big thing. There was a number of things that we did and looking at the prior estimate for 2024.
Your next question comes from the line of Michael Dudas with Vertical Research.
With regard to your proposed investments in the U.S., maybe looking in Latin America, maybe you care to remind us on an internal rate of return, risk-adjusted rate return basis, what Freeport is looking for? Certainly, on the U.S. investments, you get benefits from royalty and tax issues. But just on a general basis, even when you're thinking about your assets in Indonesia. And then the follow-up on that, is the industry relative to a year ago today? Is the industry ahead of the curve or behind the curve on meeting what the expected demand opportunities are in the market?
On the first part of the question, with respect to how we evaluate projects and returns, we don't target one number. We look at what the specific project is, what the execution risk is, where it's located. And we run a range of commodity price assumptions around it to look at. What we're really focused on in deploying capital is investing [ and ] putting our infrastructure and investments in places where we can execute the plan and in places where we've got long-term reserves because anybody that tells you they can get the copper price right is wrong because it's going to move up and down. And so what we want to have is a situation where we've got a very long life reserve where you can make that capital investment upfront and realize cash flows over a long period of time and not have to get the price forecast for copper perfect in the first year or 2.
And so when we look at returns, we're looking at those projects that have leverage to future copper. And we may -- we look at something outside of the U.S., we may apply higher risk factors and we look to get higher rates of return than what we would want to have in something like the U.S. where for reasons that Richard talked about, have somewhat of a lower risk profile for us.
But it is not one scientific number. It's a range of scenarios that we run around a project. And again, looking at the resource and the size of the investment and our ability to generate returns over a long period of time, that would be consistent, not that it would go away -- it would fall off something that could be who could be earned over a long period of time, has a long tail, which a lot of our projects do.
And Richard might have some perspectives on the second question. I think it's obvious that there haven't been new projects sanctioned in our industry for some time. And what's happened recently in recent years with the copper prices rallying and then falling off has just caused more delays, more cautiousness by developers in developing the project. So -- I would say, in my opinion, the situation has become more significant because the projects are taking longer, not shorter.
And we talked about when we started on Grasberg Underground, we started planning -- started investing 20 years ago in it. I mean you really have -- these are long lead time projects, and we really need to have started investments. And that's why we're really focused on what can we do, continue to plan for these long-term projects. So what else can we do and what can we do to take advantage of technology that's available to us? And what can we do to get more out of the resources we already have? But not everybody has that ability.
And Richard, I don't know if you want to add any comments to that second part.
Well, I'll add a brief comment to the first part too, Kathleen. The -- my early experience in my career was in the oil and gas industry. And early on, [ Dan Jurgen ] and I wrote up, wrote a paper on oil price forecasting which basically evidenced how wrong forecasts can be. And so we approach, as Kathleen described all of our investment and business planning on a scenario basis, not trying to predict a particular price or range but to look at what impact investment decisions and operating decisions have on our overall portfolio. And we look to protect ourselves on a portfolio basis from downside risk and then structure investments to take advantage of what we have is confidence in the long-term price. So it's not any kind of formal rate of return kind of criteria that you see in a lot of industries, which work elsewhere. Have the saying that figures don't lie but at [indiscernible] figure. And we just really base these things, as I said, on scenario planning and portfolio impacts.
The basic thesis, I believe, for the demand for copper is unchanged and continues to be supported. From the very work with ICMM, Chairman, 2 occasions, but more recently when all the issues about aspirational goals for carbon reductions were being considered in such promise. I've always said that there are a lot of unanswered questions and the movement towards these aspirational goals will not be consistent, but they'll have issues, complications and so forth, and that's certainly what we're seeing. The future of copper is really influenced significantly by investments in carbon reduction. And I think it's something the world absolutely has to do. There are other factors related to global growth, connectivity, these data centers, some of that's being driven by artificial intelligence. Just everywhere you turn, the world is getting more electrified. And that's why I think the fundamental long-term demand thesis for copper is just getting stronger and stronger.
Your next question comes from the line of Brian MacArthur with Raymond James.
It goes back to what Alex was asking in Bagdad. So I just want to make sure, as I look at these numbers. So the project capital is $3.5 billion. And I would have to think you get some in structure benefit there, so it's not a true greenfield. And then you talk about a $3.50 to $4 incentive copper prices, and I understand the benefits of new royalties and taxes. Does that sort of say that if you didn't have infrastructure, the capital costs would have been higher? And if you didn't have all these tax benefits, the incentive price would be an awful lot higher, i.e., if anybody else had to do a greenfield there, you'd probably need an incentive price well over $4 to make it work, i.e., those numbers include all the tax benefits and everything that you were talking about before, if I can ask the question that way.
Brian, the -- if somebody else has the same situation, greenfield and the grades we have, it would be a lot more. A lot more expensive.
A lot. Your $4 -- your $4 is absolutely right. I mean you just look at recent projects and look at how costs escalate and then what would have taken from an incentive price to justify that project from the outset if the cost numbers are known. So this is not that complicated. It's not a greenfield project. We've operated there for 80 years or so. And it's about a straightforward project as you could have, but it's telling for the industry even with this kind of straightforward project, the challenge you face. It's cost, it's tailings, and we do benefit from infrastructure. This is just a mill expansion. It's not a building a new mine, but then there's a challenge of getting workers and housing for workers. So all of this is real telling on the supply side. I just talked about the demand side support for copper.
This is a great example of a simple project in terms of the relative complexities of projects in our industry, this is relatively simple. And yet, it faces these challenges of being economically justified in today's price. At the outset, I said today's copper price is not price is adequate to stimulate the kind of investments that are going to be needed for this industry. And that's why we're optimistic about future prices.
Right. And maybe if I could just ask just on the capital allocation. I mean, you've got lots of options, as you said. But if you're successful for Phase 3, I mean you get as much production there as you would hear, I assume a fraction of the capital cost. Does Bagdad pushed in that situation? I mean, I get that the world needs probably all of it. But would they get sequenced or are they complementary? I mean I know they don't depend on each other, but are they complementary? And you would do both at once if both work?
We're prioritizing the leach initiative. I mean that is one that's a no-brainer for us. It's very, very little capital that we're investing in it and very low increment -- it's our lowest incremental operating cost of anything in the U.S. And so that's a no-brainer. We're pursuing that regardless. That makes a ton of sense, and we're pursuing that regardless. We think the world is going to need something beyond that, obviously. And so on the Bagdad thing, we just want to get it -- get it to where continue to enhance the optionality in it, and we need to do some things anyway. We're doing some infrastructure on -- on tailings that we would need to do anyway in the future, maybe not as quickly as what it would need with the new project, but we need to do those anyway. So we're going to do those to the extent we can do that efficiently. We want this autonomous thing that we're pursuing.
Years ago, people thought you didn't really need autonomous in the U.S. But now we -- particularly in these remote locations, you really, really do when you consider the cost of the workforce and the housing limitations and that sort of thing and the opportunities to upscale our employees, we think it checks all of those boxes. So autonomous, we want that to see how that unfolds.
So we don't have to pull the trigger on Bagdad now but we want to put it in a position where it can go forward. It makes sense if the world needs more copper to get copper from where we already have it. And so it does -- it's a good project. It's not a barn burner from an economic standpoint, right now, but it will have it today. And I think it will get time at some point. It just we aren't predicting exactly when.
And Brian, we got a strong enough financial position that we can -- capital is not a barrier for us to do in projects that make sense.
Your next question comes from the line of Alan Spence with BNP Paribas.
[indiscernible]
Alan, you're breaking up on us.
Sorry, I'll try again. Hopefully [indiscernible] hear me.
Yes, that's better.
The strong performance for [indiscernible] in Denver, is that a level you think could potentially [indiscernible] through '24? Or was there something you need about what happened last month? And also, if you could remind time line to get to 240,000 tonnes per day run rate?
With respect to...
We've got a great -- Go ahead, Kathleen.
Okay. I was going to say Mark Johnson is on the line, he can add to it. If you want with respect to December, what highlights, we got that SAG mill completed, the new SAG mill completed in December. So really, that gave us the ability to put more or throughput through the concentrators. And with the combination of higher grades and strong recoveries, we had a great month.
Now we have the ability to continue to have strong performance. We achieved a lot of records in December but we do have the ability and some upside to continue that. That SAG mill was originally put in the plan because over time, we'll need the additional grinding capacity, et cetera, to take the ore that will be coming but right now, while we're in these higher-grade sections, the more we can put through the mills, the better the copper production will be.
In terms of the $240 million, right now, we don't have $240 million in our plans. But over time, with the addition of Kucing Liar we'll have that capacity to do it. But having SAG [indiscernible] does give us some more opportunities in the near term to -- if we continue to have high rates of ore produced from the underground will give us some upside.
A mine, we don't talk a lot about but one that we're going to try to keep improving on is the [indiscernible] mine. It's a relatively small mine, but very, very high grade. And we've got some plans to bring in some additional and that's reflected in the 5-year guidance, but some additional throughput from [indiscernible] that will add copper production and gold production.
And Mark, I don't know if you want to add to any of those comments.
Yes. Kathleen, the only thing I would add is as part of the KL project, we also add some -- over the shorter term, we had some workflow capacity and optionality at GBC. We -- that allows us to get GBC up from like 120,000 up to 140,000 tonnes a day in 2026. And at that point, we'll be able to run close to 240,000 tonnes through the mill. The mine and mill will be matched. And then as you said, the KL come up and then GBC and KL share portions of the ore flow system, but over the short term, we sequenced that part of the KL or flow that gives us the opportunity at GBC in the much shorter term.
Your next question comes from the line of Bill Peterson with JPMorgan.
Nice job on the quarterly execution. Thanks for sneaking in my question here. So I wanted to come back to the reaching efforts, the incremental 200 million pounds. I think you mentioned 2- to 3-year period. Is that a 30 [indiscernible] ramp? Or is that more back-end weighted? And you've consistently talked about low capital intensity. Can you remind us what the capital associated with this is, I guess, quantified? And has there been any CapEx creep in interim similar to just other broader [indiscernible]?
On the time frame for the incremental 200 million, we have not given a specific time frame. We do feel we can get it done within a couple of years, and we'll add whatever we can in the interim. [indiscernible] Leach Everywhere initiative that we have, where we are -- who are accessing parts of stockpiles that hadn't been accessed before getting access to some of the side slopes and some of the areas around the stockpile that we just didn't leach before. We're -- that's been a big driver of success and will continue to be.
The other one that we're excited about is the targeted drilling. And through our data, we can see where you have situations where the solution that needs to get to the ore has been blocked for some reason over history. And this targeted drilling allows us to get access to it.
We are testing this year, some -- some abilities to do that more at scale. And that is something that we're really interested to see how that develops and whether that will give us some additional incremental production. We haven't factored that into our plans at this point. But we're going to continue to use these covers. We still don't have everything on the stockpiles are so massive, covering spanning particularly Morenci, just miles of area.
And -- so we're still doing the covers. We're still looking for other opportunities to get heat into the stockpiles. We're targeting some pyrite ores in some of our operations that have pride in the ores, that is a source of heat as well.
But there are a number of things that we're working on that or not the big R&D effort, but things that we can do from an operational standpoint. But we'll stay tuned. We will -- this is a big initiative and stay tuned will as we go forward, love to give you a little bit more as we go through 2024 in terms of the time frame.
We haven't spent much capital on this initiative. We've already got the infrastructure -- basic infrastructure, the tank house capacity, this is copper that goes to tank house, not a smelter. And we have already excess latent tank house capacity. We've spent some money but it doesn't round to anything really big. The operating cost, the incremental operating costs of this have been very low on the order of $1 per pound and so it's just a really, really exciting opportunity for us to generate value. And so -- as we go forward, we don't see huge amounts of capital either that will come into play.
When you get to this piece that's R&D, that's where we need to make sure that all these things can be applied and deployed at scale and can be economic. But that ongoing. But the first 400 million pounds, we think that we can do that without spending a lot of capital.
And you may have noted this, Kathleen, but importantly, there's no permitting issues. And that is a real challenge for any kind of project you do in terms of brownfield expansions and really tougher greenfield expansion. So here, no capital or operating costs, no permitting delays.
Our final question will come from the line of Lawson Winder with Bank of America Securities.
Thank you very much, operator. And good morning, good day, Kathleen and Richard, thank you very much for the update. I just -- if I could just sneak in 1.5 questions. One would be on the current level of the dividend. I mean, is your view that given the cash flow outlook, your view of the copper price, I mean, is this a comfortable level for the dividend for 2024? And then just my half question would be, is there any movement within your existing TCRC contracts to potentially renegotiate those or get the benefit of some of the really, really low spot pricing we're seeing today?
On the dividend question, our Board reviews the financial policy on a regular basis, and we put in place the -- the base dividend, the variable dividend, and we've been paying at that level for some time now. We'll continue to review that with the Board. You can see from our results the financial results that we're projecting for 2024 look very good but we always going to look at what's going on in the market and don't want to put ourselves in a position of running up debt, but -- and -- but we have a good balance sheet. So I don't want to front-run anything. The Board will look at this on a regular basis, but our financial position is in really excellent shape.
The second question on TCRCs, we reach agreement, as you know, with -- on long-term TCRCs that are done on fixed contracts once a year. And since then, spot rates have come a lot, lot lower given the tightness in supply. We do sell some things on a spot basis, but most of it is sold under these fixed contracts where we have the TCRC. The other thing is once we get the smelter in Indonesia up and running, we don't have -- we still do what Cerro -- still have with Cerro Verde concentrate that we sell. But everything from Indonesia will be really just process through our own smelters.
And our contracts are long term in terms of volumes, but the TCRCs are renegotiated each year. And you raised a great point for those of you who haven't followed it, but the situation right now with smelters where they can't get concentrate to process is a real strong indicator of where this market is and where it's going.
I'll turn the call back to management for any closing remarks.
We appreciate it, everyone. If there are any follow-ups, feel free to call David and we're available to continue to discuss and we'll report to you our progress throughout the year.
Yes. Thank you for joining us today, and everyone, have a great day.
Ladies and gentlemen, that concludes our call for today. Thank you for your participation, and you may now disconnect.