Freeport-McMoran, Inc. (FCX)

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Freeport-McMoran Copper & Gold Inc. (FCX)

Q1 2009 Earnings Call

April 22, 2009 10:00 am ET

Executives

Kathleen L. Quirk – Executive Vice President, Chief Financial Officer & Treasurer

Richard C. Adkerson – President & Chief Executive Officer

James R. Moffett – Chairman

Analysts

Michael Gambardella – JPMorgan

David Gagliano – Credit Suisse

Anthony B. Rizzuto, Jr. – Dahlman Rose & Co.

Mark Liinamaa – Morgan Stanley

Brian MacArthur – UBS Security

Kuni Chen – Bank of America Securities

Jorge Beristain – Deutsche Bank Securities

Victor Flores – HSBC

Gary Lampard – Canaccord Adams

John Hill – Cambrian Fund

[Peter Walker with Sansar Capital]

John Tumazos – John Tumazos Very Independent Research

Justine Fisher – Goldman Sachs

David Katz – JPMorgan

Sunil Gathader – Sentinel Asset Management

[Ross Carton – Polygon]

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoran Copper & Gold First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma’am.

Kathleen L. Quirk

Thank you and good morning everyone. Welcome to the Freeport-McMoRan Copper & Gold first quarter 2009 earnings conference call. Our earnings announcement was released earlier this morning and a copy of the press release is available on our website at fcx.com. Our conference call today is being broadcast live on the Internet and we will have several slides to supplement our comments. The slides are accessible using the fcx.com website homepage link.

In addition to analysts and investors, the financial press has also been invited to listen to today’s call and a replay of the call will be available by accessing the webcast link on our Internet homepage later today.

Before we begin today’s comments, I’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements. Please refer to the cautionary language included in our press release and slide presentation and to our risk factors described in our SEC filings.

On the call today are, Jim-Bob Moffett, our Chairman; Richard Adkerson, President and Chief Executive Officer; Red Conger, who heads up our Americas operations and Mark Johnson, who heads up our Indonesian operations. We’ve got a number of our senior operating team traveling this week.

I’ll briefly summarize our financial results and then turn the call over to Richard, who will discuss our operations and outlook. We’ll then open up the call for questions.

FCX reported first quarter 2009 net income applicable to common stock of $43 billion, a $0.11 per share, compared with net income applicable to common stock of $1.1 billion, or $2.64 per share in the first quarter of 2008. Our first quarter 2009 net income applicable to common stock included net charges of $24 million, or $0.06 a share, which were detailed in our press release, but those included $31 million in charges or $0.08 a share associated with adjustments to our environmental reserves, $22 million, or $0.05 a share for restructuring and other costs associated with our revised operating plans, $19 million, or $0.05 a share associated with lower of cost or market molybdenum inventory adjustments related to the decline in molybdenum prices. These charges were partly offset by reductions to general and administrative costs associated with reduced compensation costs totaling $29 million, or $0.07 per share, and a $19 million gain for copper derivative contracts associated with our customer contracts for rod sales.

Our first quarter consolidated copper sales of 1 billion pounds was slightly above our previous guidance of 990 million pounds and higher than the first quarter 2008 sales of 911 million pounds reflecting the higher grades at Grasberg. Our gold sales of 545,000 ounces in the first quarter nearly two times the year ago level of 280,000 ounces because of the higher ore grades at Grasberg.

Our gold sales during the quarter exceeded our previous estimates of 500,000 ounces. Molybdenum sales during the quarter totaled 10 million pounds. Those were lower than the first quarter sales of 20 million pounds, and our January 2009 guidance of 13 million pounds, because of demand conditions in the molybdenum markets. Our copper prices recorded average $1.72 per pound in the first quarter of 2009 that was over 50% lower than the first quarter of 2008.

Our realized gold prices averaged $904 per ounce, as compared with $933 per ounce in the year ago period. We have realized $11.52 per pound of molybdenum during the first quarter and that was a reduction of 64%, compared with nearly $32 per pound in the first quarter of 2008. We’ve got a number of things that we will be talking about on the call particularly on our costs, where we achieved strong execution of our revised operating plans, our unit costs during the quarter, net cash costs, net of our byproduct credits on a consolidated basis averaged $0.66 per pound during the first quarter of 2009 that was significantly lower than the year ago period of $1.06 per pound.

Our operating cash flows totaled a use of $258 million during the first quarter that reflected a very large working capital use of $919 million and that was anticipated. It was primarily associated with the timing of settlements with customers on our 2008 provisionally priced sales.

Capital expenditures totaled $519 million for the first quarter about half of that related to the initial development of our Tenke project; Richard’s going to give an update on that, which is nearing completion. We also reported previously that we completed a public offering of $26.8 million shares of common stock during February at an average price of $28 per share that generated gross proceeds of $750 million and brought our shares, basic common shares outstanding to $412 million shares. Assuming conversion of our 51/2% convertible preferred stock and our mandatory convertible preferred stock, we would have roughly $469 million shares outstanding.

Total debt approximated $7.2 billion at the end of the quarter and our consolidated cash position was $644 million at the end of March. We had no amounts borrowed under our $1.5 billion credit facility.

Now I’d like to turn the call over to Richard, who will be referring to this presentation materials on the website.

Richard C. Adkerson

Good morning, everyone. In getting ready for this conference call today, I went back and glanced at the transcript for our last conference call for our year-end results and two things jumped out at me. At that point, I said the near-term copper price was going to be driven by events in China. And by the end of the first quarter, Chinese purchases of copper had come in very strongly as they continue to spend money in building infrastructure in their country and they face a scarcity of scrap and also have been building up copper stocks, but that has caused copper prices to be strong or even in the face of very weak market conditions in the U.S. and the rest of the developed world.

The second thing at the time of our last conference call, we were completing a process that we had literally started the first week in October of revising our operating plans to adjust to the lower copper molybdenum prices. And we had worked diligently right up until the time of that call to come up with new plans, and I said, we have plans that would allow us to be cash flow positive at our mines and be supportive of our business strategy, but that investor should watch how we execute on those plans. And I’m really pleased with the results of this first quarter. And Red Conger, Mark Johnson, Dave Thornton and their operating teams, aggressively went out of those plans and the results of their activities were shown in the financial results that you see today.

Page 4, Kathleen mentioned that the price of copper is half of what it was during the first quarter of '08. Price of goal is roughly, is actually averaged a bit lower than it did in '08, which is a bit surprising, I know it is surprising to a number of people, and molybdenum was down two-thirds.

Even with that, we had a good cash flow generation taking into account, the working capital uses that we talked about last quarterly call. And we ended up with a $0.11 a share of earnings and for those who model earnings, I will point out that is net of $0.06 of special charges that Kathleen outlined for you some of you may have picked those, some of those up, some of you may not have, but it is also reflected $0.15 for the deferral of profits that we’ve actually already generated through mining and sales of copper concentrate. That will be recognized in future periods under the accounting rules, because it sold intercompany to our Atlantic Copper smelter. And once that concentrate is process and copper is sold out of the smelter. Those profits, which have already been generated in the first quarter, will be recognized in our earnings. Most of that if prices stay roughly where they are today and operations continue as we expect most of that would turnaround in the second quarter. So all things be in equal and they may not be, but all things be in equal, we would have stronger earnings in the second quarter and in subsequent quarters in 2009.

Page 5, and I will talk about this more I've got a couple of more slides shows our, at the bottom the sales by our different regions, North America, South America and Indonesia point out the significant increase in both copper and gold sales in Indonesia. At Grasberg, we are operating now in the highest-grade section of that mine. That changes overtime depending on the sequencing of our operations, and as we work on this pit, which is now almost two kilometers across in the kilometer deep, as we maintain the integrity of this pit overtime, we manage high grade sections, we mine high grade sections and other terms we have to be in the upper regions where grades are lower, but we are now in high grade sections. And you can see just what kind of leverage that has on our volumes. They are supportive of our business now. We knew Grasberg would be the keystone asset and we combined our company with Phelps Dodge and particularly in times of low commodity prices and that’s exactly the role it’s serving.

Read the rest of this transcript for free on seekingalpha.com