Freeport McMoRan 4Q16 Earnings Call Notes

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Freeport-McMoRan’s (FCX) CEO Richard Adkerson on Q4 2016 Results

Don’t give bows for Act I when the audience is looking for Act II

“as I started thinking about my presentation today I recall a comment that Jack Welch made several years ago and it was, ‘don’t be giving bows for Act I when the audience is looking for Act II’, and I know everyone here is focused on Indonesia. It’s the focus of our senior management team as we go into 2017, but having said that I’m very proud of what our team did during this past year.”

Background on Indonesia

“In 2009, the Government of Indonesia passed a new mining law and implement new regulations over, the law was passed in 2009 and it took time to put regulations in place and really the governing regulations were not completed until 2012. The law provides specifically that existing CoWs remain in effect until they expire. It also instructed the government to seek amendments to the CoW make contracts of work more consistent with the new mining law within one year.

We actually, began discussions with the designated senior representatives of government in 2011. And in 2012, the government established an evaluation team early that year to review CoWs. We’ve been in discussions with the government since 2011, 2012, but have never been able to reach a mutually acceptable agreement on reconciling the contract of work with the new mining law. The law says that the contract remains in effect.

In early 2014, concentrate exports were halted for more than six months following a troubling January regulation on exports. We didn’t export for more than six months. It cost the government roughly a $1 billion in taxes and royalties, it cost us slightly less than that. But a very substantial amount. In that year, we resolved the ban on exports by entering into an MOU with the government, in July, that covered six main points. Exports, smelter development, divestiture, all of these were subject to negotiation of legal and physical certainty and an extension of our operations from 2021 to 2041.

It was contemplated that that MOU would be resulted amendments to the CoW in six months. The government changed in late 2014, the MOU was extended in 2015 and we continued discussions with the government. That led to the government providing our company a letter of assurance regarding extension of the CoW, regarding legal and physical certainty beyond 2021. And it was that assurance, in that letter and in the MOU and in the CoW, the government has, in Freeport have honored this CoW since the first one was signed in the 1960s, and the new one signed in 1991, that has given us the confidence to make the ongoing level of investments that we’ve been making and developing our underground resources.

Now just in January of this year the government has introduced new regulations and these new regulations require CoW holders to convert to licenses called IUPK in order to export, and with a license in and of itself there is no assurance of legal and physical certainty and we have been unwilling to give up our CoW to go to strictly a license. And so, what I want to do now is, and this is in our slides and so you can review this and follow up with questions, but I want to point out what our contract of work actually says.

If we are not allowed to export it will have a significant impact on our company

“So, we’re committed to start working immediately on that. We’ve been given indications that we will be allowed to export, but I want to note specifically, we have not yet been approved for that. If in fact, we are not allowed to export, the significant impact on our company. Each day, it’s 70 million pounds of copper and 100,000 each month — 70 million pounds of copper and 100,000 ounces of gold for each month. The nature of copper concentrate is that it’s bulk material and we don’t have the ability to inventory this to any great extent. We would be allowed to ship domestically to the smelter at Gresik and we would have to restructure our business to allow us to do that, but it would be a major curtailment of our business. Unlike 2014, at this point where our company is not in a position to maintain the existing operations without being able to export.”

At this point we don’t believe that we will have to take steps to curtail operations

“So, we would have to take steps to curtail operations, curtail costs, that means very large layoffs and the cutbacks in capital spending, and we have developed plans to do that. I will say we don’t expect to have to do that based on very recent discussions with the ministry. But we — it still remains for us to get these exports approval and we’ve been given assurances that we will.”

There is the option of international arbitration

“We have the rights to pursue claims against the government in the form of international arbitration. And our legal team advises us that our case is very strong in doing that. We have consistently represented to the government that we don’t want to do that, I don’t believe that would be advantageous for us, but I also think it would be very negative for the Government of Indonesia. So, we have and as long as we have the opportunity to try to resolve these matters in good faith we’ll continue to do it through trying to reach an amicable mutually agreeable situation. But if we get to that point where we can’t and that point would include not being able to export, then we would be left no choice and we’re prepared to do that.”

EPA regulation is important to us

“The area that we’re watching that could have a big influence on us is EPA regulations. Because we inherited legacy environmental obligations all over this country from historical operations that go back into the 19th Century. And we just entered into a settlement that you may have seen with EPA and the Navajo Indian tribe in the Four Corners area with some significant historical uranium clean-up sites. We were very pleased with that, the government I going to pay significant part of that and we’re going to deal with some of those obligations on behalf of our company. So, these EPA regulations which is a big focus of the new administration is important to us.”