Freeport-McMoRan Copper & Gold Inc. (FCX)
Q2 2008 Earnings Call Transcript
July 22, 2008 10:00 am ET

Executives

Kathleen Quirk - EVP, CFO and Treasurer
Richard Adkerson - President and CEO
Jim Bob Moffett - Chairman
Red Conger - President, Freeport-McMoRan Americas
Dave Thornton - President, Climax Molybdenum
Mark Johnson - SVP and COO

Analysts

John Hill - Citi
Terence Ortslan - TSO & Associates
John Tumazos - Independent Research
John Redstone - Desjardins Securities
Brian MacArthur - UBS Securities
Victor Flores - HSBC
Oscar Cabrera with Goldman Sachs
Tony Rizzuto - Dahlman Rose
Jorge Beristain - Deutsche Bank
Michael Gambardella - J.P. Morgan
David Gagliano - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold second quarter Earnings Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. 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 Quirk

Thank you and good morning, everyone. Welcome to the Freeport-McMoRan Copper & Gold second quarter 2008 earnings conference call. Our earnings announcement was released earlier this morning and a copy of the release is available on our website at fcx.com.

Our conference call today is being broadcast live on the internet. We will also have several slides to supplement our comments this morning and we will be referring to the slides during the call. They are accessible using the webcast link on our fcx.com website home page. 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 home page later today.

Before we begin today’s comments, I would 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 materials and to our risk factors described in our SEC filings. On the call today are Jim Bob Moffett, Chairman of the Board, Richard Adkerson, President and Chief Executive Officer, and we’ve several of our senior operating team members here today including Red Conger, who runs our Americas business; Mark Johnson, who runs Indonesia and Dave Thornton, who runs our Molybdenum business. I will start by briefly summarizing the financial results and then turn the call over to Richard who will be referring to the slides and discussing our operations and outlook. We will then open the call for questions.

Today FCX reported second quarter 2008 net income applicable to common stock of $947 million. That was $2.25 per share compared with $1.1 billion, $2.62 per share for the second quarter of 2007. For the six months ended June 30, 2008, FCX reported net income totaling $2.1 billion, $4.89 per share compared with $1.6 billion or $4.80 per share in the 2007 first half. The results for the 2007 six-month period include the operations of Phelps Dodge beginning on the acquisition date following March 19, 2007 acquisition date.

Our consolidated sales for the second quarter of 2008 totaled 942 million pounds of copper, 265,000 ounces of gold, and 20 million pounds of molybdenum. This compared with 1 billion pounds of copper, 913,000 ounces of gold, and 15 million pounds of molybdenum for the second quarter of 2007. As expected, copper and gold sales volumes were lower than the year-ago quarter because of where we are mining at the Grasberg mine. We expect to begin mining in the higher grades in the second half of this year and particularly in the fourth quarter.

Our sales were higher than our previous estimates of 930 million pounds of copper, 225,000 ounces of gold and 18 million pounds of molybdenum that were reported in our earnings release on April 23, 2008. Our realized copper prices were $3.85 per pound in the second quarter of 2008. Those were 15% higher than in the second quarter of 2007. At the end of June 2008, we had copper sales of 369 million pounds, priced at an average of $3.88 per pound. That was the forward price at June 30th. Those sales are subject to final pricing over the next few months. Each $0.05 change in the price realized from the June 30, 2008 price recorded would result in an approximate $11 million effect on FCX’s 2008 net income.

Our operating cash flows during the quarter totaled $1 billion. That included working capital uses of just under $800 million. We had large tax payments and increased inventory values during the period, which required a use of our cash. Capital expenditures approximated $655 million in the quarter and our total debt was $7.4 billion and consolidated cash was $1.6 billion at the end of June. We also announced today that our Board authorized an increase in our common stock dividend from the previous annual rate of $1.75 per share to $2 per share and authorized an expanded open market share purchase program to 30 million shares from the prior level of 20 million shares. I will now turn the call over to Richard who will be referring to the materials included on our website in the slide presentation.

Richard Adkerson

Thanks, Kathleen. Good morning, everyone. This is an important conference call. We’ve got a lot to talk about. I want to talk about first, our solid second quarter performance and the factors that resulted in the financial results that Kathleen just reviewed with you. Then take an outlook as we go forward as we return to the higher grade section of the Grasberg mine and look forward to earning significantly stronger cash flows, and that forward outlook is what led our Board to take the action that is announced today to increase our dividend and increase our stock buyback program because we are going to be in a position in the near term to begin executing our financial policy that we’ve set forth previously.

Then most importantly is to give you an update and an outlook about what we are so excited about here in the company, and that is our potential to significantly increase our reserves in the medium term and to work with those reserves to add cash flow for using properties. The results for the second quarter of ‘08 that Kathleen just referred to are affected significantly by the mining sequencing at the Grasberg mine. Those of you who have followed Freeport previously understand that how this works, but I want to take a quick moment to review that because it is the principal factor that caused our volumes to be lower in the second quarter of ‘08 than in the second quarter of ‘07.

In the back of your slides on page 36 is our mining sequencing chart of where we are in the Grasberg pit. Now this is a major operation pit that is a kilometer deep and 2.5 to 3 kilometers across. As we mine it, we have to mine from the upper reaches where we’ve relatively low grades and mine downward to the high grade core of copper and gold that make this mine so great. If you look at page 36, you can see in the first quarter, we were mining in a section we call seven south in the upper reaches of the mine where we had low grades. Turn then to the next page, in the second quarter of this year, this current quarter we are reporting on, we were lowering that seven south section and continuing to mine in relatively low grades.