Ladies and gentlemen, thank you for standing by, and welcome to the Freeport-McMoRan Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I would now like to turn the conference over to Mr. David Joint, Vice President, Investor Relations. Please go ahead, sir.
Thank you, Regina, and good morning, everyone. Welcome to the Freeport conference call. Earlier this morning, FCX reported its second quarter 26 operating and financial results.
A copy of today's press release with supplemental schedules and slides are available on our website at fcx.com. Today's conference call is being broadcast live on the Internet, 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.
A replay of the webcast will be available on our website later today. Before we begin our comments, we would like to remind everyone that today's press release certain of our comments on the call include non-GAAP measures, forward-looking statements. And actual results may differ materially.
Please refer to the cautionary language included in our press release and slides into the risk factors described in our SEC filings all of which are available on our website. Also on the call with me today are Richard Adkerson, Chairman of the Board; Kathleen Quirk, President and Chief Executive Officer Maree E. Robertson, Executive Vice President and Chief Financial Officer and other senior members of our management team. Richard will make some opening remarks Kathleen and Maree E. will review our slide materials, and then we will open up the call for questions.
Richard?
Thanks, David, and thanks, everyone, for joining us today. We are pleased to release FCX's second quarter results. They can be described in a single word.
Progress. Freeport, our shareholders, continue to benefit from our long standing strategy centered on our leadership position in copper, and from our portfolio of long lived assets with established track records for operational excellence, project development, and capital allocation. Electricity means copper.
As the world continues to electrify, it will need what we produce more than ever. Freeport is particularly well positioned to grow as the market grows in the future. Our team today will talk with you about the great progress we have achieved in the second quarter across our global business.
Notably, the positive execution of the Grasberg ramp up and the strong operational execution and financial performance achieved in The Americas. Our large scale, long live production with our attractive growth pipeline positions Freeport exceptionally well, Our aspiration continues to be foremost in copper. Kathleen and I visited Jakarta and a mine site in Papua in June.
I have been traveling to Indonesia regularly since 1.99 thousand. And each time I visit, I am inspired both by Freeport's accomplishments in Papua and in Gresik and by how the Republic of Indonesia has developed and progressed over the years. The best lies ahead for Indonesia and for PT Freeport Indonesia.
I am blessed and proud to have been personally experienced and been part of this growth and progress. Our Freeport Global family is proud of the commitment and significant progress achieved by our team in Papua in the ramp up of the Grasberg Block Cave Mine. The Grasberg team has great morale and enthusiasm as it continues to access to execute exceptionally well.
We look forward to ongoing progress with the Grasberg recovery and to completing our mine rights extension with the government of Indonesia so that Freeport can continue to generate benefits for all stakeholders in the decades to come. We are also proud of the--the demonstrable progress being achieved by the Americas team through the application of modern and innovative technology to increase production and lower cost to generate increasing profits from our mature mines. it is truly impressive, and again, the best lies ahead. Our CEO, Kathleen Quirk, will now lead our discussion.
Great. Thank you, Richard, and thank all of you for participating on our call today. Where we will review our second quarter performance and update you on our initiatives, projects and attractive future outlook.
You will hear today about the work our teams are doing across our global business to drive value. The progress we have made to restore large scale production at Grasberg safely and sustainably the advancement of operational excellence and new technology initiatives, in the US, and progress on opportunities for an exciting new phase of organic growth. Starting with slide 3, we provide the highlights of our second quarter.
Our sales of copper and unit cash costs were better than our forecast. We made steady progress on the Grasberg ramp up, and combined with the favorable metal price backdrop, we generated significant margins, cash flows and earnings. The strength and diversity of our portfolio comes through in the results with our U. S. Mining operations contributing 2.4x more operating income in the first half of 2 thousand 26 compared with last year's first half with strong conversion to the bottom line.
This is further demonstrated by a 65% increase in our consolidated net income for the first half of 26 compared with last year's first half. Our Grasberg ramp up plans are on track, and together with ongoing initiatives, increased production in the Americas, we are positioned for future volume and margin growth. We are advancing our future growth options with a series of projects in progress to scale production from our innovative leach initiatives.
We are nearing an investment decision for a major expansion of our Baghdad mine in Arizona. And advancing our regulatory work in Chile for a significant expansion at our El Abra mine. During the quarter, we increased our ownership in Cerro Verde through the opportunistic purchase of Cerro Verde shares in the open market bringing total purchases over an approximate 2 year time frame to over $300 million increasing our ownership by 2% to over 55%.
In addition, we returned $600 million to shareholders in the first half including roughly $200 million in share repurchases. Our financial position remains strong and markets for our products are positive. Providing a solid foundation to invest in value enhancing growth while returning cash to shareholders.
On slide 4, we reiterate our ongoing priorities. Which are centered on our drive for increasing shareholder value. Disciplined execution of our plans including our ramp up progress at Grasberg, crystallizing the value of our Americas Leach opportunity, adopting new technologies to improve performance, and investing in profitable growth will enable us to build significant value in our business.
Our team is committed to the success of these initiatives dedicated to overcoming challenges along the way, and steadfast in our drive for excellence in all that we do. Turning to the copper markets, on Slide 5. As a leading global supplier of copper, Freeport is strategically well positioned and benefits from copper's essential, increasingly important role in the global economy.
Copper's superior thermal conductivity makes it the metal of electrification and the world is quickly becoming more electrified. Globally, copper demand is expected to rise in a number of applications including the massive requirements for the power grid to support new technologies. LME copper prices averaged $5.93 per pound year to date through June.
And closed yesterday at $6.30 per pound on the LME, an increase of about 12%. Since the start of the year. In the US, COMEX copper is currently trading at an approximate 2% premium to LME pricing.
As we speak with our customers across the US, they continue to report robust copper demand and order books associated with AI data centers and related energy infrastructure and improved demand from the auto sector which is more than offsetting weakness in private construction. Recent reports out of China, the world's major consumer of copper, reflect continued strength in copper demand associated with power grid and electrical infrastructure and significant exports of Chinese manufactured copper containing goods. Visible inventories in China continue to draw to multiyear lows, and exchange inventories located outside of the US are exceptionally tight.
As we look forward, it is clear the market will require additional copper supplies to meet growing demand And at Freeport, we have a valuable geographically diverse portfolio of copper assets and are strategically well situated for the long term with large scale production long live reserves and resources, and a portfolio of low risk brownfield expansion opportunities to serve a growing market. I am going to move to the operating highlights by geographic region and that is on slide 6. Starting with The US, we are making important and tangible progress in increasing mining and processing rates.
Our equipment reliability metrics are improving with a key example at Morenci where second quarter mining rates were 30% higher than the average achieved over the last 5 years, a great accomplishment. Sustaining the higher mining rates will translate into improved copper production over time and we expect copper production to grow in the coming quarters. Our innovative leach initiative continues to show promise and a number of projects are in motion.
Targeting meaningful potential to scale. The deployment of our first internally developed additive is producing results and we are planning to field test 2 additional high potential additives in the coming quarters. Pilot testing at Morenci is underway where we are testing heated solution, leaching solution in our existing stockpiles.
We know that increasing temperatures in our stockpiles will enhance recoveries and our work is focused on finding the most effective engineering and cost solution to achieve this. We remain encouraged with the ability to achieve further scale in the near term and unlock our long term path to 800 million pounds per annum from this initiative. We are also continuing to incorporate innovation into our basic mining practices and see significant value in using emerging technologies to enhance operating performance.
In South America, performance was positive as the team effectively navigated mine and mill constraints. Despite the challenges, mining and milling rates during the quarter exceeded expectations and sales and cost performance was slightly better than estimates going into the quarter. At Alabra, our operation in Chile in partnership with Codelco, there is significant activity currently with a leach pad extension and plans to conduct testing in the back half of 26 of heated stockpile injections to enhance leach recoveries.
We are pleased with the engagement with the Chilean government following the submittal in March of our environmental impact study for major expansion at El Abra, and we continue to advance this process. We are very pleased to report steady progress with the ramp up of the Grasberg Block Cave mine during the second quarter. As you will see from the chart, production rates at the Grasberg Block Cave doubled during the quarter from an April average of 34 thousand tons per day to an average of 69 thousand tons per day in June.
Upgrades to the material handling system for our automated rail system are progressing on schedule. And we continue to advance work for a restart of production Block 1 South in 2027. And are progressing a series of risk mitigation initiatives.
Consistent with our April 8 update, we continue to target overall rates in the district approximating 65% of full capacity in the 0.580% by mid 27, and approach full capacity by the end of 27. The team is doing excellent work executing the phase ramp up safely and efficiently, and we continue to derisk the plans and increase confidence in the long term outlook. After reaching a memorandum of understanding with the Indonesian government earlier this year, to extend our operating rights for the life of the resource We submitted a formal extension application in June in accordance with agreed MOU terms.
Formal license approval would provide continuity of large scale operations enhance future growth options and durable benefits to Freeport Indonesia's many stakeholders. Turning to growth on slide 7. As we talked about market fundamentals, point to requirements for additional copper supply and Freeport is really well positioned to grow supply with a robust organic growth pipeline.
We benefit from a portfolio of projects, which can be developed from Freeport's known resources in jurisdictions where we have established history and experience. We have progressed a number of these projects to where we now have line of sight to more advanced stages. We are entering a period of growth in our Americas business with near and medium term opportunities to scale our leach initiatives and more than double production at our Baghdad mine in Arizona.
We have longer term growth in the Safford Lone Star District, and an exciting project at El Abra in Chile. As we talked about the extension of rights at Grasberg, will open up additional opportunities longer term. These projects are all brownfield in nature, and leverage our existing infrastructure our experienced workforces, and relationships with key stakeholders and communities to move more quickly with less risk than a greenfield project.
We are using innovative approaches to improve efficiencies, reduce cost and capital intensity, and shorten lead times for our projects. The high potential, low cost innovative reach initiative is an excellent example of using new technologies to maximize value from our existing resources. Our low capital attend in intensity associated with the Leach initiative, makes it 1 of the more attractive investment return projects within our industry.
We talked about the results from the existing additive that we are testing. And we expect additional results to come in coming quarters from both new additives that we are deploying and heated leach solutions to provide support to achieve our near term scaling objectives and to define the pathway to significantly higher leach production over time. We are finalizing the investment case for a major expansion at our Baghdad mine in Northwest Arizona.
And expect to be in a position to move to towards a final decision in the second half of this year. The Project benefits from a large resource In An Established Operating Environment Opportunities To Capture Economies Of Scale, And An Attractive Fiscal Regime In The US. We have studied the project extensively, and it would make Baghdad the second largest copper mine in The US behind our flagship Morenci mine.
And we have taken a number of steps to derisk the project execution. We are continuing to final finalize our capital cost estimates We are working closely with vendors and contractors as we advance engineering to retest our capital cost estimates and update economic evaluation. While our review is ongoing, preliminary indications based on current market conditions indicate capital in the $4.5 billion range which is approximately 30% above the estimate prepared in 2023.
The increase reflects commodity and labor escalation revisions to project scope, and updated estimates associated with additional engineering. With enhancements to the operating model, the project still remains supported at a $4 per pound price of copper. Well below current markets.
With significant long term exposure to favorable copper markets. As a reminder, there are no major permitting hurdles We have done a significant amount of planning and early work and can complete the project within a 3 to 4 year time frame. Studies are continuing in the Safford/Lone Star district.
Very excited about this. To evaluate the optimal expansion and development options We have continued to work to capitalize on the large undeveloped resource we have in an established US mining district which is near the Morenci Mine. At El Abra, we have a great opportunity with our partner Codelco to develop a large scale expansion.
This is a significant resource with total copper reserves at Alabra approaching the size of the large position we have at Cerro Verde. The Chilean government is enthusiastic about the project, and is working with us to achieve a timely review of the application. The project positions us extremely well to transform El Abra from a relatively small current producer to a significant contributor in Freeport's portfolio.
Again, the theme of this is an established mining operation located in a low risk jurisdiction. In Indonesia, we also benefit from a large resource position and have a long history and successful track record. We continue to progress the Coochin Liar project in Indonesia to sustain a low cost long term production profile in the Grasberg district and a life of mine extension opens up additional future growth options.
Moving to slide 8, where we talk about Freeport as America's copper champion. Where a significant portion of our reserves, resources, and future growth are located in The US. Report is an important American copper producer and is by far the largest contributor to The US copper market with an established and successful franchise dating back to the late 18 hundreds.
We are aggressively pursuing a series of initiatives to enhance our US business through innovation, automation, and investment in expanded facilities. We are targeting adding production with low incremental costs to improve profitability and resiliency of our US business. In an industry where development lead times can span more than a decade, our US business is strongly positioned with a potential for a 60% increase in copper production over the coming years.
Our team is very positive about these opportunities they represent a value driver of significance for Freeport. In addition to an impressive outlook for growth, recent performance in our US business is notably positive. Coming in as our highest earnings contributor across the portfolio year to date.
This highlights the exposure of our business in the U.S. to favorable copper markets, and the strength of Freeport's diversified portfolio under a broad range of market conditions. I will now turn the call over to Maree E., who will review the financial outlook and then we will take your questions.
Thanks, Kathleen. On Slide 9, we show our 3 year outlook for sales volume. Of copper, gold and molybdenum.
Which remains broadly consistent with our April estimates. And as we move through 2026, we expect a large increase in second-half sales volume driven by higher volumes at Grasberg and our US operations. As you will see in the reference materials on Slide 20, our second half copper sales are expected to be over 20% higher than the first half.
And gold sales more than 65% higher. For 2027, we expect annual copper sales to increase by more than 20% compared with 2026 and gold volumes to increase by more than 50%. With additional growth projected in 2028 for both copper and gold.
Our teams remain focused on disciplined execution of our plans globally. Including the phased ramp up progress at Grasberg, which is well underway. And growth volumes in The US.
On last quarter's call, we discussed the cost pressures impacting our business in connection with the conflict in The Middle East. And the volatility in oil and related products. As well as sulfur and acid.
Whilst markets remain volatile, our current estimate for 2026 average unit net cash cost approximates $1.90 per pound. Slightly below the April estimate of $1.95 per pound. With higher byproduct credits more than offsetting other unit cost increases.
Putting together our projected volumes and cost estimates, we show modeled results on Slide 10 to EBITDA and cash flow at various copper prices. Ranging from $5 to $7 copper. These are modeled results using the average of 2027 and 2028 with current volume and cost estimates and holding gold flat at $4 thousand per ounce.
And molybdenum flat at $30 per pound. Annual EBITDA would range from approximately $13 billion per annum at $5 copper to $20 billion at $7 copper. With operating cash flows ranging from approximately $9.5 billion per year at $5 and $15.5 billion at $7 copper.
We show sensitivities to various commodities on the right. You will note we are highly leveraged to copper prices. With each $0.10 per pound change equating to approximately $390 million in annual EBITDA in the 2027, 2028 periods.
We also have exposure to gold prices with each $100 per ounce change in price. Approximating $105 million in annual EBITDA. Molybdenum, which has shown significant price strength in recent months, each $1 per pound change in molybdenum approximates $85 million per annum.
With our long-life reserves and large scale production, we are well positioned to generate substantial cash flow to fund future organic growth and cash returns under our performance based payout framework. Slide 11 shows our current forecast for capital expenditures in 2026 and 2027. Our 2026 capital remains consistent with our prior forecast.
And 2027 capital expenditures are estimated at $4.8 billion. Approximately $300 million above the April estimate. Reflecting investments in upgraded mining equipment and revised cost estimates.
The discretionary projects are expected to approximate $1.6 billion in 2026, and $1.9 billion in 2027. With roughly 50% related to the Kucing Liar development and the LNG project at Grasberg. The balance includes acceleration of tailings and other infrastructure to support the Baghdad expansion upgraded mining equipment, and capitalized interest.
The discretionary category reflects the capital investments we are making in new projects, that under our financial policy are funded with the 50% of available cash that is not distributed. These projects are value enhancing initiatives and are detailed on slide 27 in our reference materials. These estimates exclude projects that remain subject to completion of final studies and board approvals.
Including the Baghdad 2x expansion project. We continue to carefully manage capital expenditures and will continue to deploy capital strategically to projects with the best return and risk reward profile. Finally, on slide 12, we reiterate the financial policy priorities centered on a strong balance sheet cash return to shareholders, and investments in value enhancing growth projects.
Our balance sheet is solid with investment grade ratings, robust credit metrics, flexibility within our debt targets to execute on our projects. We have no significant debt maturities during 2026, and have substantial flexibility for funding the 2027 maturities. With our strong balance sheet and significant cash flow generation, we have substantial resources to invest in future growth projects in a prudent manner whilst returning cash to shareholders.
Since adopting our financial policy in 2021, we have distributed $6.3 billion to shareholders, through dividends and share purchases. And have an attractive future long term portfolio that will enable us to continue to build long term value for shareholders. Our global team is focused on disciplined execution, profitable growth, and long term value creation.
Thank you for your attention.
We will now turn to questions.
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] touch tone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key again. If you are using a speaker phone, please pick up your handset before pressing the numbers.
We ask that you please limit your questions to 1. If you have additional questions, return to the queue. 1 moment please for our first question. Our first question will come from the line of Lawson Winder with Bank of America Securities.
Please go ahead.
Thank you, operator, and good morning, Richard and Kathleen. Thanks for the call, and Maree as well. Very nice to hear from you all.
Congratulations on a solid quarter and progress at Grasberg. If I might start with Baghdad, thank you for the additional color and the additional guidance. You have noted an upfront CapEx expected to be somewhat higher than the 2023 estimate, yet you are still looking at an incentive price of around $4 per pound.
Are you seeing some offsetting operating level benefits that would offset that higher CapEx? And then should we think about a decision on this project in 2026, or should we be thinking about that spending starting in 2027?
Thank you, Lawson, and thanks for your thanks comments. We are doing a lot of work on the on the Baghdad project to be in a position to review it with our board and seek final approval in the second half of this year. We have been doing a lot of work, as I mentioned, with our vendors and suppliers to really nail down the capital cost estimates We are we are going and getting seeking firm bids.
We have been working with the with the contract labor organizations who are going to supply the construction labor. To define the rates and incentives to make sure that we get the best people to come to, this operation it is a very competitive construction labor market. In this region right now.
With the activity from everything from semiconductors to data centers, etcetera, power generation, And so we are doing a lot of work to make sure that we have good estimates of what labor is going to cost and what all the various components are going to cost We have we have taken some approaches to work on how we can be more efficient doing off-site labor, doing some prefab work, And so we have done a lot of extensive work on how to execute the project In parallel with that, we have also been working on the operating plan and working hard to think about the future of Baghdad not being what it a typical project would be in the past, but how we can look at the operating model and bring in new technologies. We have already, you know, put in the autonomous trucks there. This mine will be completely autonomous.
We are looking at other areas of the operating model to be more efficient. And so we have been working on that, working on our operating plans, We have also been looking at the throughput from this concentrator and how it might impact how we may be able to get more out of the existing plans for expansion. And so we have optimized the operating plans.
We use the long term markets for, for all the input costs and still have a very attractive project when you think about at $4 copper, which is significantly below today, covering cost of capital, and having exposure to this very large resource that is gonna make Baghdad a lot more resilient a lot lower cost, and a modern facility that will take us out for decades. As we bring down costs, that expands the resource. And so we are not just bringing the resource forward, but we are having the opportunity to expand the resources we go forward.
So there is a lot of attributes that, as we have been working on this project, we are recognized recognizing that the operating model can bring further efficiencies and that is helping the economics and helping offset the higher capital cost. that is very helpful. Thank you so much.
Our next question will come from the line of Katja Jancic with BMO Capital Markets. Please go ahead.
Hi. Thank you for taking my question. When I look at the Grasberg mine plan, it shows that in 2028, there is a bit of a reduction to copper and gold.
Production. Can you talk a bit about what is driving that?
Yeah. The over the 5 years, it is very similar to what we had presented in April. We did have some lower grades in 2028 compared to the to the prior estimate But in terms of the operating rates and the plans, they are all very, very similar, but there was some sequencing timing changes in the 2028 time frame.
Okay. Thank you. Thank you, Katja.
Our next question comes from the line of Carlos De Alba with Morgan Stanley. Please go ahead. Carlos de Alba: Yeah.
Thank you. Good morning. Richard, Kathleen and Maree E. Just on Grasberg, congrats on submitting the formal application for the extension.
Can you maybe, Kathleen or Richard, give us an update as to what the timing and the next steps would be for, you know, hopefully reach a final agreement. And any color on potential terms, that you have been, discussing?
Okay. Well, the terms were agreed and negotiated as part of a memorandum of understanding. So we signed a memorandum of understanding in February, with the government of Indonesia and it was witnessed by the president.
And those were the terms that were negotiated and approved at the time. So what we have filed in June is the formal application consistent with the terms that were agreed to in February. So the mines, it is we submitted it to the Energy and Mines Ministry and they have a process that they go through to review these, extension applications.
There is a regulation that was passed some time ago that allows for life of resource extensions for companies that are integrated And, of course, now with the with the completion of our new smelter in Indonesia, PTFI is a fully integrated producer, and supplies refine copper in Indonesia and abroad. So it is it is consistent with regulations and we are the we expect that the MOU terms will be the terms that we ultimately have under the under the new license. In terms of the timing, we are working diligently to respond to any questions that the Energy and Mines Ministry has.
All of us want to we share the objective of getting this done on a timely basis. it is very important, and the government recognizes this, that we have sufficient time for planning the future, so that we get the license extension and can begin to look at opportunities that would allow us to continue beyond 2041 to provide large scale production with significant benefits that go to the government, government owns, 51%, and we will own more than that after 2041. But we also pay significant taxes and benefits to the local community. So it is all aligned of the advantages and importance of this.
And so we will work through the regulatory process as quickly as we can, but there is no prescribed time frame to getting it done But we are working very hard to get it done this year.
Carlos, when we when we went to Indonesia and Jakarta and later the job site, in June. It was 1 spectacular day. Of all the days that I have been going there at the end of this day, I felt it was 1 of the best we ever had.
I have had the chance to have private meetings with the president and with many of his very top advisers The president who I have known since the 19 nineties, was very positive and encouraging. Totally understood. The need to get this done, the issues if it did not get done.
And he is he is also focused on international relations in a major way and felt that this getting this done would be a very positive and building positive good relationships between Indonesia and United States. So all the signals are good. As Kathleen says, we have to go through this process.
But everybody understands that this is something that is necessary and beneficial for all the stakeholders, not just shareholders, but for the government, the workforce, the community, and Papuans who rely so heavily on PTFI's operations for its economy. So we feel very good about the meetings, and now we just have to work through the process. And in Indonesia, sometimes that takes time.
Fair enough. Thank you very much, Richard and Kathleen. Thanks, Carlos.
Our next question comes from the line of Timna Tanners with Wells Fargo. Please go ahead.
Hey, good morning. Hi. Could you provide a bit more information, please on the purchase of the stake in Cerro Verde and, you know, is there an opportunity to do a lot more of that?
How do you think about those purchases? Balancing them with shareholder returns going forward?
there is a, you know, relatively small float that is publicly traded, for Cerro Verde. And so when those opportunities become available, it is something that we, you know, take a hard look at. We you know, of course, the asset is spectacular.
And so Freeport would be interested if there are opportunities that arise you know, reasonable values to continue to increase, but there is a there is a limit on what we can do, and there is not a lot that becomes available. And so we will just have to continue to be opportunistic about it. You know, this is investing in an operation we already own and manage and the economics have been attractive to date on our share purchases.
It does not really, you know, impact the share buybacks at the FCX level. We are, you know, we are continuing that program which is based on our as Maree E. was talking about, the performance based where we look at the cash flows and return 50% of available cash to shareholders both through dividends and share purchases. But, we are very pleased to own more of Cerro Verde and be would be interested in owning more of the opportunities, if the opportunities arise.
Okay. that is helpful. Thank you very much.
Our next question comes from the line of Nicklaus Cash with Goldman Sachs. Please go ahead.
Hi, team. Thank you so much for taking my question. Just wondering on Freeport and the ramp of Grasberg I mean the 1Q guidance, I think, estimated an average of 60 thousand per day in the second half of 26 and you guys are exiting June at, you know, about 69 thousand tons per day in June.
Just wondering what is driving that as the ratio of wet to dry draw points improved and could there be potential upside to that? 60 thousand average in the back half of this year?
Thank you, Nicklaus. And, Mark Jerome Johnson is on the line as well, and he can supplement my comments But in terms of the second half of this year, it is in line with what we had guided to in April. We did exit June at an average of 69 thousand tons per day from the Grasberg Block Cave, and we are our guidance is based on a 60 thousand to 65 thousand plus or minus in the second half. what is going on in the second half is that right now, we are completing the work that we were doing in 1 of the shoot galleries associated with this spilminator work that we are doing, the chute regulator that we are putting in, to allow us to have flexibility to deal with certain types of ore types And then we will transition to another area in the second half.
To complete that maintenance work or those upgrades. And so during the second half, we will have some of our production We will we will have some production coming on as we complete the current work. And then some production going down to complete that work.
So we will we will kinda be at a steady state from June forward as we as we complete these projects to upgrade the material handling system, And then as we get into 2027, that work is completed earlier in the year, and then we bring on production Block 1 South, which will add production in 2027. In terms of the conditions, they are good at Grasberg. We have had we talked about wet and dry in April.
But we have had as we expected, but we have had some draw points that were wet in April convert to dry, as we have had, you know, more activity and move and movement in the cave in terms of production. And, also, we have had you know, you read a lot about the wet conditions in Chile, but we have had dry conditions in Indonesia. So our wet to our dry to wet ratio has, has improved throughout the, the quarter.
But these upgrades that we are making will give us a more robust plan longer term to be able to deal with any type of, of material. So that is a long term investment that we are making but we will have some downtime associated with that. In the in the second half, which is all reflected in our guidance and consistent with where we targeted in April.
And that work is going very well. While we are on the topic, Maree, you know, maybe you can add a little bit about add to what I said, but also add about what we are doing in terms of the risk mitigation and how we are how we are working towards being able to get back into production block 1.
Sure. Nicklaus, just to add to what Kathleen covered it really thoroughly, the areas in which we are currently working on these shoot galleries to install the new technology that we proved up about 3 months ago. 1 of those is in CG44, which has 9 shoots. it is 1 of our bigger production areas for the next 3 years. So when that comes up, which we expect it to be done by the end of the year, we will we will see an increase in production associated with that. there is about 25 thousand to 30 thousand tons a day that come out of the C G 44 area.
So that will be a step change once that is complete, and then in 2027, we have some ongoing construction on implementing these shoots that will be taking place in the future, you know, 2.73 thousand as well. On the mitigation we have made progress. We have had a number of drill holes that we have been able to get into the old pit bottom.
And that along with the drier weather, the pit bottom is essentially dry. We know that the rain's gonna come back at some point. it is like Kathleen said, the El Nino is gonna is drive for our part of Indonesia. We have got a new drill that I know we have talked about before. that is being commissioned right now. it is in place.
And we are we are should be drilling within the week. On that. We will have another drill of that same type coming in August.
And so we have plans with this new drill that where the current drill technology, we might get 5 to 10 meters a day with core drilling. This new drill, we expect to get well in it well above 100 meters a day with a larger diameter. So that is gonna be a key part of our ability to continue to address any collection of water in the pit bottom.
So that is going well. We have started a new drainage gallery that will be along the north side of the pit bottom. Within outside of the cave, but will give us additional access for drilling and other opportunities to remove any material that would gather in the pit bottom.
And then we are advancing a couple other We are looking at being able to drop in a surface slurry pump that works continue to go on. That will be something that would be more towards the end of 2027. So all of these are going in parallel.
We have made good advances on all those. At the same time, we are working in the PB-1 area finishing the cleanup, reinstalling the shoot gallery, re reinstalling the spilminator shoots, in CG-21, which services a big part of the PB-1 South area. So that is on track as well. that is all very helpful.
Thank you so much.
Thank you. Our next question will come from the line of Orest Wowkodaw with Scotiabank. Please go ahead.
Thanks. Good morning, Kathleen, Richard and Maree, and congrats on the great result in the second quarter. I just wanted to ask about the guidance for the year.
It looks like there is some reorganization and sequencing, maybe at some of the mines because, yeah, sales down versus the prior expectations for the third quarter. A 750 for the third quarter. And it looks like it is made up in the fourth quarter.
So maybe just you could talk about timing on that. Front.
Right. Thank you, Orest. So for the third quarter, our production is expected to be significantly higher than sales.
Most of that is in Indonesia, where, we are we are starting to ship concentrate from the mine site We have been shipping to 1 smelter, We will start, shipping in the in the third quarter, to the new smelter and it will take some time to build up that inventory to be able to run consistently in the in the new smelter. So we have got some as we have gone through the actual operating plans of the smelter and the timing of refined copper sales We have got some timing adjustments between third quarter and fourth quarter. But we do expect to build some inventory in the third quarter and make up some of that in the fourth quarter.
Okay. If I can ask a follow-up. In terms of cash costs, you did take the full year guidance down slightly despite obviously, gold prices coming in a little lower, I guess, we are saying the expectation is 4 thousand.
But in terms of the impacts from the energy, diesel, straight of Hormuz issues, any changes to that versus what you about in the first quarter? As Maree E. talked about earlier, know, situation continues to be volatile. With respect to diesel prices.
We are assuming prices that are pretty similar to what we experienced in the second quarter. So we changed it modestly in terms of the assumption going forward. But it is pretty similar to what we what we, had in the in the second quarter. there is also some impacts of sulfur and acid.
That we are rolling through But in 2026, we do not have a lot of asset that we purchased on a on a spot basis. So that impact is not is not significant. But we will, you know, we will be subject to in the oil markets.
I know they are up today and we will continue to monitor that. But the, the average is pretty similar to what the second quarter was, which was elevated you know, compared to, earlier this year. Just to comment on acid, while you see the impact of sulfur and acid in our operating cost, we also benefit from Freeport's position with the a fully integrated producer So in our in our revenues, we are getting the benefit of selling acid as well.
So that provides an offset, but you do not necessarily see it necessarily So that is an advantage that we have where we essentially have a hedge on soft acid with our with our significant smelter operations.
Our next question will come from the line of Liam Fitzpatrick with Deutsche Bank. Please go ahead.
Good morning, Kathleen and team. I have I have got 3, hopefully, quick questions on your U. S. Business. Firstly, Baghdad, is there any possibility that this could receive any kind of government grants or incentives to offset the CapEx budget.
Second 1, just on smelting and refining growth opportunities, just given the growing importance of in country processing assets? Are you looking at any options to expand your smelting and refining capacity beyond Baghdad and your leaching operations? And then the final third 1, just on your leaching operations, what is the level of confidence in reaching this 300 million-pound run rate at the end of this year?
And should we view this as incremental volumes? Or will there be some offsets from lower productions elsewhere in the in the asset base? Thank you.
Thanks, Liam. In terms of incentives for Baghdad, you know, you start with the fact that you know, the fiscal regime in The US is very attractive. Relative to other countries.
And that is know, part of the reason why when you look at a mine like Baghdad, you know, the we do not have royalties. Because we own the land and fee. And our tax position in The US is attractive.
Even after we go through the NOLs the effective tax rate in The US is substantially lower than it is in other countries. So that really does help with the with the economics having a less of a financial burden from royalties and taxes. In terms of incentives, 1 of the things that we are continuing to pursue is the opportunity for because Freeport is an integrated producer again, in the US, we have a smelter in Arizona, 1 of 2 smelters operating in The US.
We would qualify under certain incentives under 45 x for a 10% production tax credit The first step was getting copper designated as a mineral, which has been which was done several months ago, and we appreciate the administration's work on that. And now the next step would be to get it put into the treasury regulations that would allow for copper to conform to the critical minerals list. And be part of this 45 x credit, which equates to about $500 million a year.
And so that would go a long way in helping us with our investment plans in The US to continue to reinvest things like invest these production tax credits into our US business. So we are continuing to work and speak with there is some proposed bills in congress to do this. We are continuing to work on it.
And that would be a really attractive way for us to, you know, make significant strategic long term investments in The US. In terms of the question about smelter, today, we process either through the smelter or through our leach processing all of the copper that we produce in The US. We have had exports from time to time with concentrate, but that is that is been small.
And, essentially, we are processing either through the smelter or leach processing, everything that we produce. With a Baghdad expansion, we could potentially look at opportunities, and we have been looking at opportunities potentially to expand the Liam smelter, which is running extremely well performing extremely well. And so we will to look at whether that makes sense for us, You know, there is some advantages of, of the smelter and logistics.
And having that additional acid. They are synergies that come back, you know, to our operations So we are we are we are taking a tough look I mean, a hard look at that opportunity as well. And then the third question around the target on scaling the leach opportunity The you know, we are just we are just around 200 plus or minus a day.
We are getting to the run rate of 300 by the end of this year. We the where we are today is a lot of the work that we have done on tactical execution, and bringing in incremental pounds through the operational processes that we have been deploying We have been installing additional irrigation lines. We have been using technologies to have targeted drilling to inject solutions.
But the next phase, and it is very exciting phase, of opportunity comes from the innovation work that we have been doing. I mentioned the additive work and the heat work, and those 2 things are gonna allow us to get more scale and then define the path to really, a new copper mine, the way it looks. So Corey Stevens is on the line, and his team is working on this. it is 1 of the most exciting things that we are doing in the company.
And, maybe, Corey, you can just maybe give a little more color on what we are doing to get scale in the this really fun and attractive Leach Innovation opportunity.
Yeah. Thanks, Kathleen. The base tactics, we call that leech everywhere that is been more mature as we continue to you are leaching with, you know, putting in drip line in with helicopters or refining our raffinate injection processes with feedback loops with improved censoring and analytics.
We are even recontouring certain piles that allow us to access to areas that were unleachable before that allow us to leach before that. that is giving us a strong foundation And then you have got the additive work that comes behind that. So our Gen-1 additives are in deployment. The early results are better than we had expected.
To see, and we are we are continuing to monitor that. But we are not waiting. We have we have got Gen-2 additives that we believe are a multiple effectiveness than the Gen-1, and we have already got sourcing in place and 4 targeted demonstration piles across the portfolio, a couple at Morenci, 1 in New Mexico, and then El Abra, an additional pile there.
Then so we are pretty excited about that. that is gonna that is giving the early results from the Gen-1 is giving us good confidence on that front. Additionally, then, you know, we talked about some of the heat projects, but at pilot at Morenci is going. We have got in the final phases of construction, more of a demonstration commercial unit. that is gonna be starting in the in the second half of this year at El Abra.
El Abra is particularly sensitive to temperature so we are excited there. We are we are sure there is gonna be learnings as we get into it, but the team's actively and dynamically thinking through all the different permutations of what could happen there and what adjustments we might make. And so that will actually set the foundation as we go forward on those fronts.
For the next wave of heat as we move into the next phase. And so we have got geothermal drilling going on at Morenci that could add a substantial amount of additional heat as we refine those recipes there is there is other tactics that we are going through with the smaller sites. This is opening up options to consider additional what we call rehandle or opportunities where we can move older piles to more convenient locations to heat and or additives and then below cutoff grade.
Opportunities. So, you know, as we consider expansions or some of our major projects with Safford, you know, how does how does these new learnings come into play and add incremental value or replace the capital that you would otherwise use for more traditional methods. So all those are in flight.
Thanks, Corey. K. Bye. Thank you.
Thanks for the detail.
Our next question will come from the line of Bill Peterson with JPMorgan. Please go ahead.
Question and nice job on the quarter. I guess I am not sure if it is best, but I guess for Richard, expectations around any sort of change in 32 copper rulings, get the President, Freeport is really pushing 1 way or the other given there is probably pros and cons. But can you talk about how this might benefit The US footprint including how much NOLs remain and then any impacts on the broader market?
Thank you, Bill.
So we and the rest of the market are continuing to monitor and wait for decisions on February as you know, Bill, the decision last year was to review it again in terms of copper cathodes. Review it again for potential to add a add a tariff on cathodes, under a phased approach beginning in 2027. there is been no decision on that situation. You have seen the situation where a lot of copper has moved to The US in anticipation that something might be coming but there has not it has not been a decision yet.
And as I mentioned before, when you look at inventories outside of the US, it is created a very tight very tight market situation, particularly in the in the heavy consuming regions in Asia. So everyone's watching the situation closely. In terms of how it how it would impact Freeport, if there is a tariff and if there is a premium, all of our US sales priced on the Comex.
And so, you know, we could be in a position to get a higher price for copper on our US sales than we do internationally, but we will have to know, we will have to see. And you can see the breakout of our US sales, and that is an area that is growing. Right?
I mean, that is an area that is growing in terms of this work we are doing on mining rate improvements and also on this leach initiative. So it would Freeport would be a big beneficiary of it for our US business In terms of the NOLs, we do have about just under $6 billion of net operating losses which we can use against our US income. You can probably see in the results that we started to pay be subject to a minimum tax in The US this year.
And it is, you know, relatively small effective rate. Is somewhere in the 6% to 7% range, and we will pay that you do not take NOLs against that tax. But we do expect for the coming years for the NOLs to start to be used as we at current markets.
And but we will have multiple years of being able to use those NOLs. Thanks, Kathleen.
Our next question comes from the line of Bob with Bernstein Research. Please go ahead.
Good morning. I am impressed by the Morenci mine rate being up 30% in the second quarter. Can you talk to how you are defining mine rate there?
And what might the implications be for, say, copper sales going forward or lessons learned there that you could apply more broadly?
Thank you, Bob. We have been working on this for a number of years. As we went through the pandemic, and went through a lot of a lot of turnover in the workforce.
We our and intentionally during the pandemic to because we did have a reduced work and did have constraints, we intentionally took down the mine raid But then rebuilding that mine rate has been a, a labor and a work in process for a number of years. And so there are a combination of factors that have come together to see this roughly 900 thousand tons a day of material mined in the mine. And that is, you know, substantially higher than what we have achieved in the last 5 years.
A great accomplishment but it is been a lot of work, a lot of focus, on and using technologies to allow us to be more efficient and get our equipment health and asset health because it is because it is all interconnected with shovels. And all of your equipment to get everything working to where it should be And now we are at a point where the availabilities are of the existing equipment are much higher. Than they have been our maintenance programs are performing much better.
We are not having as much unplanned downtime, which is an area of focus for us. But it is it is really it is really exciting we have to sustain it. And that is that is what we are emphasizing that these are disciplines that need to be institutionalized and we need to sustain it every single day.
And so it is a, you know, a constant. But Corey, you wanna add anything to that in terms of the journey and what we see as we go forward?
Yeah, Kathleen. it is been pretty exciting that the way we talk about it internally is you know, where we are focusing on people process and technology it is not 1 or the other. there is there is no technology solution that is gonna be the end all, be all. I mean, there is there is a lot of hard work that with the we mentioned the labor workforce is stable, but now, you know, the team is stepping up and a lot of leadership and coordination that is going on. We have we have centralized some of the activities.
Around the mine work so that you know, we can have the expertise in the right location, provide the insights to the field folks so that they are able to make better decisions and not have to you know, manage the 20, 30 things that they have to manage in the shift. They get these insights. You know, during the during the shift and being able to make the right calls as they go.
And then we are layering on more technology on top of that to add another layer of sophistication to as, you know, 1 piece of equipment, you know, might break down, alright, with what is the best option to go to a different area? 1 other thing worth probably mentioning that is that is gonna add some wind to the sales is during the second quarter, We started transitioning a number of trucks to a higher capacity 400 ton ultra class truck. that is gonna continue throughout the remainder of this year We have got plans to add an additional 20 to plus trucks next year in the same fashion. And so as we were able to exhibit operating excellence and we get better tooling, we expect to see even better results as we go forward and work through the volumes that we wanna work through.
Very clear. Thanks a lot. My follow-up would be we are we are getting close to the official license for the Grosberg extension.
That sort of is the flag to go back and explore Can you tease us on how you think about exploration plans for that region once everything is done.
Well, we have some targets that we are pursuing below the Deep MLZ as an extension. And so that is that is exciting We have done some drilling there. We are gonna con we are gonna pick that back up.
But that is an exciting opportunity for us. The other opportunity is our resources do not end in 2041. Our existing resources.
So with the Coochin Liar project as a for instance, that asset can continue to go for many years beyond 41. So, that, you know, that is a way for us to you know, really leverage the existing operations beyond 2041. So we have this is a district that you know, has not been explored extensively in many years and we have just been adding extensions that could make sense within the 2041 time frame.
But with an extension, it is gonna open up a whole you know, whole a whole new horizon for us. With the extensions of existing ore bodies and including Deep MLZ, including Fuchsin Liar, So it is a it is a it is a and because you have that existing infrastructure, infrastructure, it makes it compelling from a from an economic standpoint. Very clear.
Thank you.
I think it was I think it was clear from Kathleen's comments, but because we did not have any rights beyond 2041, we have not reported any reserves beyond 2041. Even though we know that the existing resources will extend beyond that, And then and we begun some of this earlier as we were making progress with the government in our negotiations. We have begun to do some extension exploration work and that is 1 of the points we keep making with the government about the need to get this done.
Quickly as possible so that we can understand what the resources are because that will affect all of our future plans for processing, tailings control, and all of that. So there is 1 thing that is characterized as Grasberg District since it was first discovered in 1.99 thousand. it is always gotten bigger than we any of us working on it thought it would. And so that is why we are excited about seeing what else lies out there and with this extension that will give the ability to do that.
Our next question will come from the line of Daniel Major with UBS. Please go ahead.
Hi. Yes. Most of my questions are asked, but 2 quick ones. 1, you referenced some of the incremental increase in the 2028 CapEx associated with spending at Baghdad tailings and preparation for the expansion.
Is that incremental to the 4.5 billion CapEx guidance? Or is it to some degree, part of that? that is the first part. And then the second part, on the North American business.
You previously guided to a target of $2.50 per pound operating costs in 2027. That still a valid estimate?
With respect to the first question, what is in our numbers for CapEx for Baghdad is the work that we have been doing, and we are gonna continue to complete on the new tailings facility. And this is work that we accelerated to put us in a position to be able to do the expansion but was going to be required in any case with the existing assets because we have got so many so much reserves there. It would be required in the future.
So that is in our CapEx forecast. What we do not have in the forecast at this point is and it is pending, you know, final decision is the, is the CapEx for the project in terms of building the concentrator and related infrastructure? And so that would be an add to the existing projects when, you know, when the to the existing CapEx when the projects approved, We have substantial ability to fund it out of cash flow.
We expect and we have been kinda planning for this for some time, and our balance sheet's in great shape as well. In terms of the target in the US, we continue to have a target of $2.50. Per pound.
The current market conditions with energy prices and sulfur and acid prices are taking that opportunity a little bit away from us in 2027, but we are continuing to work on that We have got Corey talked about some of the work we are doing on automation and technology improvements. To improve our basic mining practices, build more efficiency, the Leach initiative with scale, will go a long way to helping us because that is lower much lower cost than our than our 3 roughly $3 average in The US. So it is still a target. it is still something we believe is achievable.
At this point in time, it is it is it is not something with current markets that we can achieve in 27. But we are continuing to work on things within our control that will allow us to bring the cost down. And that incremental leach is, is 1 that will be a big driver for us.
Orest. Thank you.
Next question comes from the line of Brian MacArthur with Raymond James. Please go ahead.
Hi, good morning and thank you for taking my questions. A lot of them have been asked If we can just go back to the Baghdad expansion and all the discussion about the incentive price, have you changed your assumptions for molybdenum in these economic And if so, what molybdenum price are you using? Second question, just on molybdenum, you are a big producer of this, and there is a lot more interest in it.
It looks like the primary operations are producing a little more. Can you maybe talk about any opportunities there And the other incentive price question, just you have talked a bit about the NOL. In that new incentive price for Baghdad, are we assuming a lot of NOLs?
Or maybe another way to ask the question is if you did not have NOLs, all else being equal, would you still do Baghdad?
I will start with the last part of the question, and we look at it on a pretax and an after tax basis. And so, really, on an at the end of the day, we are looking at on an after tax basis, not including the NOLs. And so the project still support supports at a $4 incentive price supports the economics.
So we it does not it is not relying on the NOLs, but it does benefit from the favorable fiscal regime that we have in The US. So the effective tax rate in The US for mining is relatively low relative to the rest of the rest of the places where we operate. In terms of the moly price, we always run, you know, ranges.
But in terms of that $4 case, we were using a $20 moly. Price. Which, you know, the price now is substantially higher than that, but we will be using a $20 moly.
What was the second part? Brian, of this question? Just in general with Molly being better, you do you have nobody ever we do not talk about it a lot, but you do have a primary molybdenum business that I assume is doing a fair bit.
Is there any opportunity to get additional value out of Climax and Henderson? We do have ability at, at Climax. You know, that mine could produce more moly We also, you know, have a lot of byproduct, Molly.
And this Baghdad mine, as you point out, has got significant byproducts. The Sierrita mine which is 1 of the lowest grade copper mines, is 1 of our lowest cost. So the lowest cost in The US with benefits from its significant moly production So with El Abra, we will have moly and a new project.
So the byproduct, Molly, is you know, that goes right to the bottom line. So that is a focus for us as well. But we do have some optionality with the big operation we have at Climax.
Orest. Thanks. And just maybe 1 last question.
Assuming all the projects meet your investment hurdles, it sort of looks like you know, bad Baghdad, we can make a decision maybe this year. maybe 2 or 3, 4 years to produce it. So it is producing an early 2030. You know, El Abra, you kind of go through the permitting process.
You are talking 2033. Safford/Lone Star, you still have to get what you need, and you talked about it being producing in the 20 thirties. Are the timelines of Safford and El Abra gonna end up at the same time?
And if so, would you feel comfortable building both of them at the same time, or would they be kind of sequential projects just from a peer management of large project strategy. Well, 1 of the things, Brian, that we know is that within the Freeport organization, when we focus on a project and put resources on it, our execution is extremely well. Extremely positive.
Know, some of the things that lessens learned over time is doing too many at 1 time, not just from a financial standpoint, but just from an execution standpoint makes it more challenging. But we are organizing right now in terms of allocating resources to Baghdad allocating resources to El Abra. The Safford opportunity as Corey pointed out, is we are really excited because we are gonna be able to use some of the learnings for it from this leech work.
And so the flowsheet on Safford may look different than the others, may not be you may have a smaller concentrator and do primarily leaks. So we are excited about you know, what it what it might do, but we are still in the throes of studying it. The permitting process for the Safford opportunity is more compressed relative to what we have in Chile.
So you could theoretically have an opportunity at Safford around the same time as El Abra. But our focus really is on defining the opportunity and then look at what makes sense, how to sequence these things, how we are resourcing it, how we execute it most efficiently. But the work we are doing today is to really crystallize the value and the and the option opportunity and better understand that.
Orest. Thanks very much for all that color. That is very helpful.
Thanks, Brian.
Our final question will come from the line of Chris LaFemina with Jefferies. Please go ahead.
Hi, Kathleen, Maree, Richard. Thanks for taking my question here at the end. So actually, I have 2 quick ones.
First, on the new smelter in Indonesia, I know you received the insurance proceeds last quarter, but is there any outstanding work that needs to be done there to complete the repairs, or is that good to go and get the full capacity? it is my first question. And secondly, just on Kathleen, you explained earlier the variability in copper sales on a by quarter basis through 2026, and part of that is a function of building inventories at the smelter. So you have changed your guidance quite a bit on a quarter by quarter basis.
But I am wondering if your internal projections on copper production rather than sales on a quarter by quarter basis have changed since the end of last quarter. In other words, have your production forecasts been unchanged, but it is about building more inventory at the smelter and that is why sales are being pushed back. Is it is it something happening in production side as well?
Thank you.
Okay. With respect to the, the smelter, it is the work all the work that we needed to do with the new smelter is complete. And actually had started operating last year.
We completed all that work in the first part of 2025, and it had started operations during 2025 before the before the September event. So it has been operating in a standby mode to date. We have been taking advantage of the time to really go through and complete any work that was that was left over from the main project, test things, train our teams, and so that smelter is has been ready to go and ready to go.
I cannot wait to get started. In terms of the production there is really no there is really no, you know, pluses and minuses. But in terms of Grasper, really no changes in production, but we have got a we have got a different shipping plan and operating plan for the smelter which and it takes time to get through the smelter and to be able to, to sell the refined sales.
So what you are seeing on sales is actual refined copper sales and our production is very similar to what we talked about in April. Perfect. Thank you.
And I will now turn the call over to management for any closing remarks.
Well, we appreciate everyone's participation and questions. If you have any follow ups, feel free to reach out to David, and we look forward to reporting in the future on our progress.
Thanks, everyone, for participating Onward and Upward.
Ladies and gentlemen, that concludes our call for today. Thank you all for joining. You may now disconnect.
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