Earnings Call Transcript
FREEPORT-MCMORAN INC (FCX)
Earnings Call Transcript - FCX Q1 2023
Operator, Operator
Ladies and gentlemen, thank you for being here. Welcome to the Freeport-McMoRan First Quarter Conference Call. Currently, all participants are in listen-only mode. We will have a question-and-answer session later. I would now like to turn the conference over to Ms. Kathleen Quirk, President. Please proceed, ma'am.
Kathleen Quirk, President
Thank you, Regina, and good morning. Welcome to the Freeport-McMoRan conference call. Earlier this morning, we reported our first quarter 2023 operating and financial results, and a copy of today's press release 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 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, and a replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially. I'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 today is Richard Adkerson, Chairman of the Board and Chief Executive Officer; Maree Robertson, our CFO; Mark Johnson, our Chief Operating Officer for Indonesia; Josh Olmsted, Chief Operating Officer for the Americas; Mike Kendrick, who leads our Molybdenum Business; Cory Stevens, who leads our Engineering and Project Development Activities. I'll turn the call over to Richard who will make some opening comments, and then we'll come back and review the prepared slide materials and then take your questions.
Richard Adkerson, Chairman and CEO
Thank you, Kathleen, and thank you all for joining us. Kathleen will review the results of the quarter and our outlook, and I'll join our team in responding to your questions. I'm pleased with our global team's responses to challenges we faced in the first quarter. You all know, mining is a tough business, that's evidenced by the recent reports throughout the industry. Who you are in our industry is defined by your responses to challenges. I'm very proud of who we are at Freeport. Our team in Indonesia, once again, proved resilient in overcoming a major flood event. Now, we're accustomed to dealing with rainfall at Grasberg. It's located high in the mountains of New Guinea, one of the wettest places on the globe. We just celebrated our 56th anniversary of operating there. Our systems are designed to handle significant rainfall. The intensity of the event we experienced in January was unusually severe. Our established systems prevented major damages. Our team bounced back quickly by taking immediate actions to restore production and mitigate future risk, and we have a great start in the second quarter with operations there. Kathleen and I have made a series of trips to Indonesia in recent months. For me, it's personally gratifying to experience the markedly more positive attitudes there about Freeport than in years past. All this resulted from the partnership we established with the government in 2018, the success we have achieved in the multi-year large scale development of our underground operations, and the positive outlook for copper in the future. Grasberg has now returned to rank as the world's second largest copper mine. Our net cash cost of production at Grasberg in the first quarter was a negative $0.08 per pound. We're now working positively with the government to extend PT-FI's operating rights beyond 2041 in a way that benefits all stakeholders. At Cerro Verde, our team negotiated through a volatile period of political turmoil in Peru. Our team rallied around the community and our workforce to handle the situation in a remarkable fashion. Our US team is stepping up to overcome the challenges associated with labor availability in the United States. We appreciate the commitment and drive of the global Freeport team to reach our goals in challenging circumstances. Copper markets continue to be supported by low levels of inventories, China's accelerating economic recovery, and the ongoing positive global demand drivers for copper. Our customers continue to buy all the copper we can produce and seek more. As we move forward, copper miners will be required to expand production to meet demand. At Freeport, we're in a strong position to develop new sources of copper supply to grow our business from our vast brownfield resources and also to grow our business from the rapidly developing leach technology and the supporting data analytics. At Freeport, we benefit from strong franchises and support from communities where we operate. We are committed to maintaining a strong balance sheet. We have an exemplary track record of success and project and operations execution. Focused execution is the backbone of our culture at Freeport. We have a clearly defined strategy and a relentless drive for achieving long-term success. And Kathleen will now review our slides.
Kathleen Quirk, President
Thank you, Richard, and I'll start on slide three. You've probably seen we published our Annual Report and our Sustainability Report today, and the reports are available on our website. The theme of this year's Annual Report is The Power of Copper. It highlights the critical role that Freeport and our principal product, copper, play in powering the global economy and the growing uses of copper as the world decarbonizes and re-imagines modern infrastructure to support a highly connected world. We're also proud to publish our annual Sustainability Report. We've been reporting on our comprehensive sustainability initiatives for 22 years now, and transparency continues to be enhanced. The report summarizes our initiatives, our achievements, and the challenges that we face in managing the safety, social, and environmental aspects of our business, which are critical to our long-term success. We use international standards, best practices, and third parties to measure our performance and responsibility to our stakeholders. We hope you'll have the chance to review this information and engage with us on these topics. We'll turn to slide four, which summarizes our key operating and financial highlights in the first quarter. As previously disclosed, our Grasberg operations were temporarily disrupted in February, following a significant weather impact in our mill area. As Richard said, the team did a great job to safely restore production to normal levels in March. Despite the lower volumes compared with our estimates going into the quarter, our consolidated unit net cash costs were essentially in line with our guidance. Consolidated cost per unit averaged $1.76 per pound in the quarter as higher byproduct credits more than offset the volume impact. As Richard mentioned, notably, even with the disruption, Grasberg unit net cash costs averaged a net credit of $0.08 per pound, meaning the gold revenues more than offset the cash costs of production. With the return to normal operations in March and a great start in April, we expect our volumes to be strong in the balance of the year. Our margins in the quarter were strong, our EBITDA totaled $2.2 billion in the quarter, operating cash flows, which were net of a $500 million use of cash for working capital totaled $1.1 billion. We funded investments during the quarter of $1.1 billion. That included about $400 million for major mining projects and $300 million for the Indonesian smelter, which is being funded from proceeds from financing we raised last year. Excluding net debt associated with the smelter, we ended the quarter with $1.3 billion in net debt. Our balance sheet, liquidity, and financial flexibility are in terrific shape. The outlook is positive for free cash flow generation in the balance of the year. The next slide, Richard talked about the challenges we faced in the first quarter, and we faced these across our global operations. Our teams executed well in the circumstances. And you can see on the left, the production impact of the weather event at Grasberg in February and the strong recovery in March. In Peru, we and other companies experienced a challenging environment earlier in the year associated with widespread protests, which impacted supply chains and transportation routes. Our team at Cerro Verde did a great job managing the situation efficiently and safely. The situation in Peru has improved in recent weeks, and we're now operating at normal rates. In the US, we were challenged with ongoing labor shortages, extreme weather events earlier in the quarter, and unplanned maintenance issues. We're working to improve productivity and reliability, focusing on skills development and pursuing technology and automation initiatives as we aggressively seek to recruit workers with ongoing tight labor market conditions in the US. The leach recovery efforts, which we'll talk more about, really helped to offset some of the shortfalls in mining rates, and we're going to continue to build on this. Turning to the markets on slide six. Freeport is well positioned as a leader in the global copper industry. Demand for copper is expected to accelerate going forward with projections for demand to double by 2035. Copper is essential in electrification. Low carbon investments in renewable power and electrification are driving massive growth in demand. In addition, the initiatives by many countries from major infrastructure programs and the uses of copper for connectivity, data, and artificial intelligence are also growing demand drivers. At the same time, the industry's ability to meet this rising demand is a real challenge. All of us can look back at this time last year when many were projecting the market to move to a surplus in 2023, pointing to the new projects that were coming online. As we look at the situation today, most analysts now project the market to be balanced this year even with the new projects, and longer-term, the projections are for very large deficits. Under this backdrop, we believe prices will need to rise to incentivize new supplies. And at Freeport, we benefit from a large reserve position, as you see on the slide, and an even larger resource position to grow our business in the future. We're strongly positioned to continue to support growing demand and are pursuing several of these initiatives to enhance production going forward.
Richard Adkerson, Chairman and CEO
On slide seven, we talk about the molybdenum markets, and as we've discussed, in addition to being a leading copper producer, Freeport is the world's largest molybdenum producer. Last quarter, we spoke about the significant rise in molybdenum from $18 per pound in late 2022 to a high of over $38 per pound in the first quarter of this year. We realized $30 per pound for our molybdenum sales in the first quarter. The price rose sharply beginning in late 2022 in response to supply issues and favorable demand drivers in energy and aerospace sectors. The prices began to drop from the highs in recent weeks, partly related to improved supply. As we look forward, the demand drivers for moly are positive, and since moly is principally produced as a byproduct from copper mines, it's also subject to some of the same supply issues as we have in copper. The current price of moly approximates just over $21 per pound. We're really excited, moving to slide eight, to give you an update on our leach initiatives, which Richard referred to earlier. Our efforts to increase copper production through enhanced recoveries from our massive leach stockpiles is continuing to gain momentum. Based on our results today, we're gaining increasing confidence in achieving our initial target of 200 million pounds per annum and have begun to model what the next phase could look like. On the left side of the chart, we summarize the various categories that make up the initial 200 million pound target, basically in three buckets. The first is related to heat, increasing temperatures within the stockpiles. The second is an initiative we call Leach Everywhere, which is focused on making sure the entire stockpile has the benefit of the liquid solution we use to leach copper. And the third category, which is really important, involves data analytics using new data available through sensors used in a variety of ways, including optimizing the amount of solution used and the rate of application we use to achieve the best results. It's been proven that increasing heat in the stockpiles enhances recoveries. We've advanced the installation of covers on our stockpiles for heat retention, and we've mechanized the process, which has allowed us to execute more efficiently. We now have over 30% of our massive stockpiles covered. These initiatives provide 30% of the targeted increase. The Leach Everywhere initiative makes up 50% of the uplift and uses targeted drilling to improve the flow of the solution that may not be getting through the stockpile. We're also drilling injection wells to add the liquid solution to lower stockpile sections. The sensors we've installed and access to other technology used in oil and gas formations are providing new information on where additional leach solution would stimulate the process and support higher production. The data analytics work is providing new insights. We really haven't had the benefit of this in the past, and we're now able to get the benefit to determine the optimal operating protocols under various conditions of the stockpiles. The initial success of these initiatives adds production at low incremental cost and a low carbon footprint.
Kathleen Quirk, President
In parallel with our initial activities, we've been doing substantial work on the drivers to stimulate leach production and have modeled results on what the next phase of initiatives could yield. We see an opportunity to add an additional 600 million pounds per annum from these initiatives, which would provide a total of 800 million pounds per year. That's the size of a major new mine without the capital intensity and a very low incremental operating cost. The three areas of focus are highlighted in the center of the slide, and we're in various stages of development on each of these initiatives. We've got a lot of work to do to advance these initiatives, and some of this requires further innovation, but we have a clear path to success in this program. We're evaluating opportunities to increase the temperature further by heating the liquid solution before application on the stockpile. We're evaluating options to do this using solar-generated power, geothermal, or other renewable sources at our mine sites to accomplish the additional heat requirement. We're also testing various additives that we're developing both internally as well as from third-party initiatives. And we're using artificial intelligence in our journey and in our evaluations to help expedite the process. We're also evaluating options to inject air into the stockpiles in areas that are not getting enough oxygen. Again, we have much more knowledge of what is going on within the stockpiles and are working to design solutions to restimulate copper production. Freeport is in an exceptionally strong position to lead the industry in this area with massive stockpiles currently under leach, ongoing mine leach, mine for leach activities and the latent tank house capacity that we have. This will be part of our growth plans as we go forward in addition to the organic growth that we have to develop new copper in traditional ways. And slide nine highlights the growth and development outlook.
Richard Adkerson, Chairman and CEO
And as we look at growing copper demand and the limitations and risks associated with actionable greenfield project development, our strategy and development priorities are focused on extensions of our existing operations and our portfolio of brownfield opportunities. On slide nine, we show our near-term, medium-term, and longer-term development options. Following the significant growth in recent years achieved through the successful Grasberg development, we're focused on advancing to the next phases. In the near-term, we see the best options for growth and achieving our initial leach targets and actions to enhance productivity and reliability in our US operations. If we can get our mining rates up in the US, which we're working on, and hit our targets for asset efficiency and reliability, we have the opportunity to add an additional 200 million pounds per year with limited capital investment. In the medium-term, we've outlined a series of initiatives. The first includes the second phase of our leach project. We're also looking to expand our Bagdad mine in Arizona and expect to complete feasibility studies this year. We have a major opportunity in Chile at our El Abra project and we already have an existing operation and looking to expand it significantly. And we're in the process of developing a new 90,000 ton per day block cave mine in Indonesia called Kucing Liar, which is currently in progress and expected to commence initial production by the end of the decade.
Kathleen Quirk, President
At Bagdad, we're making some investments, which are included in our new capital expenditure guidance to conduct early works in the tailings area to enhance optionality to move more quickly with the mill expansion project, following completion of the feasibility study. Longer-term, and we're already working on these projects, as they require long lead times, we expect we'll have the opportunity for further major expansion in the Safford/Lone Star district where we have identified significant resources, and we have a series of US brownfield projects that can be pursued. In Indonesia, Richard talked about the extension discussions we're having, and the extension of our operating rights beyond 2041 would open the door for continuation of large scale mining and potential additional development options in one of the world's largest and highest-grade copper and gold mining districts. We're in an outstanding 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 for shareholders. On slide 10, we provide an update of our three-year outlook for sales volumes. We've updated the 2023 sales guidance to take into account the first quarter disruption and the impact of lower mining rates in the US. Despite the disruption at Grasberg in February, our gold volumes for 2023 are about 3% higher than prior estimates. We've incorporated the estimates for stronger gold recoveries than in our January forecast, and we're doing really well in that regard. The guidance for 2024 and 2025 is unchanged. But with continued success in our leach efforts, we have some upside to these estimates. On slide 11, we show a comparison of our prior unit net cash cost guidance for 2023 compared to our current estimate. We currently estimate unit cash costs to average $1.55 per pound for 2023, that's slightly lower than our January estimate of $1.60 per pound. The impact of the lower copper volumes is offset by higher byproduct credits and a reduction in export duties in Indonesia associated with our smelter construction progress. Our assumptions for the key commodity-based input costs are similar to the January estimates. We're starting to experience less inflationary pressures in certain areas than in 2022, particularly for energy, while labor costs, services, and equipment components have increased. In the reference slides on page 23, you'll note an approximate 7% increase in site production and delivery costs for our US mines compared with prior estimates. This largely reflects a reduction in volumes in the US associated with the challenges we discussed earlier. And we've got ongoing initiatives to improve productivity there. Moving to our cash flows. On slide 12, we show modeled results for EBITDA and cash flow at various copper prices ranging from $4 per pound of copper to $5 per pound of copper. These are modeled results for 2024 and 2025 with our current volume estimates and our cost estimates, and we hold gold flat at $2,000 and molybdenum flat at $18 per pound in these models. Our annual EBITDA under these scenarios would range from over $10.5 billion per annum at $4 copper to $15 billion per annum at $5 copper. And operating cash flows would range from $7.5 billion per year at $4 copper to $11 billion per year at $5 copper. We show some sensitivities to the various commodities on the right. And with our long-term long-life reserves and large-scale production, we're really in a position to benefit from future metals-intensive growth trends and the prospects for increasing cash flows and cash returns under our performance-based pay-out framework. On slide 13, we provide an update to our capital expenditures. Current forecast excludes the Indonesian smelter project, which is being funded with cash that we released last year in a bond offering. But our current forecast for 2023 totals $3.5 billion. That's up from the prior estimate of $3.4 billion, and capital expenditures for 2024 are currently forecast to approximately $3.3 billion. The change from our prior guidance principally reflects investments we're planning at Bagdad to jump-start early works to support optionality for future expansion. The bad debt investments or projects that we categorize as discretionary and do not reduce the cash available for distribution under our pay-out policy as they will be funded with the remaining 50% of free cash flow retained for growth projects. On slide 14, we've got some great pictures showing the construction of our new smelter in Indonesia. This is a major undertaking for us. It's impressive, and it will be on a world-class scale. The project will become the world's largest single-line flash copper smelting facility, and it's advancing rapidly. We expect to commission the project in 2024. The project will include a precious metals processing facility and an expansion of the existing nearby smelter, and it will align with Indonesia's downstream policy and enable PT-FI to process all of its concentrates domestically. In closing, on slide 15, we summarize our financial policy, which is centered around three priorities, with the cornerstone being a strong balance sheet. We've achieved that. Our balance sheet and liquidity are strong and provide significant financial flexibility for the future. We're executing the performance-based pay-out policy, which provides for 50% of our free cash flow to be allocated to shareholder returns in the form of dividends and share purchases and the balance available to invest in our projects. We'll continue to pay a base dividend and a variable dividend at a combined annual rate of $0.60 per share. Since commencing the performance-based pay-out policy in 2021, we've returned about 60% of our free cash flow to shareholders and it further strengthened our balance sheet along the way, providing capacity for funding new projects over time. We did not purchase shares in the first quarter, but have availability under our share purchase authorization to conduct purchases pursuant to the policy, and we have a positive outlook for substantial free cash flow generation in the future depending on prices and other factors. The three priorities of balance sheet strength, allocating cash flow to a mix of shareholder returns and organic growth, we believe will enhance long-term value for the benefit of our shareholders. Our global team is energized. We're motivated to continue building value in our business, and we're executing our plans responsibly, safely, and efficiently. Thanks for your attention, and we'll now take your questions.
Operator, Operator
Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Chris LaFemina with Jefferies.
Christopher LaFemina, Analyst
Hi, thank you, Operator. Kathleen, Richard, I appreciate your time on my question. I have several questions, but I will start with one and then return to the queue. There is a lot of merger and acquisition activity in mining right now, particularly in copper. Richard has mentioned exploring M&A opportunities in the past, yet not much has materialized in recent years. I'm curious about your overall approach to M&A. Are there specific regions you're focusing on? How important are operational synergies? What key criteria do you use, or is it mainly about being opportunistic? Furthermore, is M&A becoming more prominent on your agenda due to overall industry consolidation? Thank you.
Richard Adkerson, Chairman and CEO
Thanks, Chris. As you know well for a long time now, I've been saying that consolidation would come to our industry. It's inevitable because of the challenges in developing projects. And it's not just a price issue; it's really just the availability of actionable projects for companies to pursue. Companies in our industry that are diversified have had copper at the top of their strategic list for a long time. It's notable the overall lack of success in developing new projects. There have been a few, of course. So all those things come together and lead to what we're seeing going on right now with M&A activity. Now for us, we don't have a strategy of growing through M&A. We are focused on our large-scale inventory of reserves and resources that Kathleen described. But that does not mean that we would not take advantage of opportunities that may arise. So we're not defining regions or any other criteria. We would only do something if it was clearly something that was value-enhancing for our shareholders. So we're not in a position of looking for things to do. But now with our company having made such great progress in strengthening our balance sheet, completing the major underground conversion at Grasberg, and advancing on all fronts, we would be in a position if an opportunity arises, but it would only be in that case.
Operator, Operator
Your next question will come from the line of Emily Chieng with Goldman Sachs. Please go ahead.
Emily Chieng, Analyst
Good morning, Richard and Kathleen. My question is just around the leaching technology that you've talked a little bit more about today. And I wanted to dig through the 600 million pounds of step change in leaching volumes there. I think as we talk about the third-party catalytic leaching technology, I think that's been deployed at El Abra and Bagdad currently. What percentage of that 600 million pounds does that account for? And perhaps could you talk to the time line to getting there? And whether or not this could mean the El Abra expansion mill expansion could be delayed further if there's a strong success there?
Kathleen Quirk, President
Emily, it's Kathleen. I'll let Cory Stevens elaborate since he's leading the efforts. Regarding the additional 600 million pounds, a portion may come from these additives, but it's crucial to highlight that the additives we are exploring are both internal and provided by third parties. We have a trial happening with a relatively small stockpile at Bagdad with Jetti, and we're initiating new projects with Jetti at El Abra. However, most of what we're discussing involves initiatives we can manage independently. It's not overly complicated. The sensors and data we currently possess are guiding us to the issues, identifying where the solutions are not penetrating the stockpile and where the stockpile lacks oxygen. Once we pinpoint these problems, we, as an industry, can address them. At Freeport, our substantial stockpiles present a significant opportunity. The primary opportunity lies at Morenci; if you examine our 38 billion pounds, you'll notice a significant portion is from Morenci. If we succeed with this initiative, it could potentially compete with traditional mill technology at El Abra, although we are still uncertain. Our focus is on solutions available through third parties, but our goal is to resolve this independently as it's the best way to optimize yields for Freeport. Cory, would you like to add anything?
Cory Stevens, Engineering and Project Development Lead
Yes, Kathleen, no, you said it well. So our R&D efforts, we've been chasing some internal leads that look very promising. And then in the first quarter, what we've been able to do is couple our work with artificial intelligence and machine learning, much like how big pharma uses to develop their new products in a way that's driving us to increase the breadth and scope of the candidates that we're looking for implementation. And then in parallel, we're actually bringing in more capabilities to do quick tests and medium-scale tests and in the field at scale tests, but that's where we're most excited, and then coupling that with some of the temperature activities, we see that our confidence is growing on that front.
Operator, Operator
Your next question will come from the line of Carlos De Alba with Morgan Stanley. Please go ahead.
Carlos de Alba, Analyst
Yeah. Thank you very much. Good morning, everyone. Just on Indonesia. I wonder if you can give us perhaps an update on how the conversations are for obtaining the export license, the extension of the export license in June? And also any conversations that you may have had with the government and your local partner on extending the contract beyond 2041 ahead of time? Thank you.
Richard Adkerson, Chairman and CEO
Yes. Thanks, Carlos. All of these things are happening in parallel with each other. To get the contract extension approved and there's widespread support for it within the government requires some procedural actions to deal with existing government regulations and then also to amend the IUPK that we were granted in December of 2018, and that would be a fairly simple process. So we are really encouraged by it. The June date has to do with this broader issue the country is pursuing with downstreaming for minerals broadly. And so that's why that was there. We don't anticipate that will be something that would limit our ability to continue operations beyond June. Anything more, Carlos, to be specific on it?
Kathleen Quirk, President
I would like to highlight that our IUPK, which was established in 2018 as Richard mentioned, permits us to maintain exports until the originally anticipated date of December 2023. This agreement includes force majeure clauses, meaning that the delays we've faced due to COVID and supply chain issues are qualifying events. Our IUPK grants us the right to export, but we still need to get government approval to enforce this regulation that was put in place after the IUPK was signed to limit exports across a wide range of minerals, though it's unclear which specific minerals are affected. We are collaborating with the government and keeping them updated while they have been visiting our copper smelter site and are quite impressed with the progress we have made. Unfortunately, construction will be mostly complete by the end of this year, but not entirely finished. Therefore, we will require permission to continue exporting. It's also crucial for government revenue that exports continue, given the alignment we have established with them. We will continue to pursue this, and while we haven't received the extension beyond June yet, we are optimistic about obtaining it.
Richard Adkerson, Chairman and CEO
And Kathleen is right that we have these legal rights that are documented, but I want to emphasize, we're working cooperatively with the government and not just pushing our legal rights, and we're getting a good response from it.
Carlos de Alba, Analyst
Right. Okay. And just one clarification. For the extension beyond 2041 or the contract beyond 2041, is this something that requires legislative approval or is it just an executive decision, obviously, together with the ministries and all that?
Richard Adkerson, Chairman and CEO
The government will determine how to document it. There is a way to proceed without needing new legislation. We currently have strong support from the Indonesian parliament, who have visited our operations. The parliamentary group overseeing mining came to the US to see us. I want to highlight that the overall sentiment has shifted positively. The President visited our operations in late August and early September, and it was a very encouraging experience, one of the highlights of my career in Indonesia. We're building on this to find the best way forward that is beneficial for everyone involved; the government, the local community, the workforce, and our suppliers all stand to gain. We're collaborating to determine how we can move ahead, as having a deadline on operations would not be advantageous for anyone. The 2041 date comes from our original 1991 contract and was included in the 2018 IUPK. We haven't conducted extensive drilling to assess the resource beyond what was needed to support the production profile through 2041, but we already have identified a substantial resource beyond that. I'm enthusiastic about the opportunity to drill further; for over 30 years, Grasberg has consistently increased in size, and I'm confident that continued drilling will reveal even more due to the nature of the ore system and the available grades. Our goal is to work with the government to secure an extension, allowing us to carry out an active delineation program. Currently, we only report reserves through 2041, and this extension would enable us to develop reserves beyond that date and create growth plans. It’s an excellent long-term asset for our company’s future.
Carlos de Alba, Analyst
All right. Thank you very much, Richard and Kathleen.
Richard Adkerson, Chairman and CEO
Okay. Thank you for your question.
Operator, Operator
Your next question comes from the line of Brian MacArthur with Raymond James. Please go ahead.
Brian MacArthur, Analyst
Good morning. I just want to follow up a little bit on the leaching situation, and I appreciate all the detail. I just want to clarify, I think, you said most of this was internal, so it's not Jetti. But then you made a comment about the bulk of it being Morenci. Morenci is sort of 50% of the stockpiles, but there's a whole bunch of other North American stuff. Is there a tank house issue? Or is that 800 million constrained going forward by anything else? Or could it just be bigger if you can do stuff at Bagdad and Sierrita and everywhere else?
Kathleen Quirk, President
We have an unused tank house capacity of about 1 billion pounds per year across the business, located in various sites. This is compelling because it requires minimal additional capital investment. Historically, leach production has declined over the years, but we're seeing a revival of what it used to be. New data about our stockpiles is giving us a clear plan to rejuvenate previous leach production levels. While we could invest in new tank house capacity if necessary, the immediate opportunities lie within our existing facilities. The most significant impact to date has been at Morenci, which will likely contribute the majority of additional production. However, there are also opportunities at other locations, including inactive operations and active leach stockpiles. The most valuable prospects are in areas where we are already conducting leaching.
Richard Adkerson, Chairman and CEO
Morenci is currently the largest leaching operation in the world, and it is where much of the modern leaching technology was developed many years ago. I really wish I could express the excitement of our team working on this. It's truly enjoyable to witness. We are leaching everywhere and we will extract resources until the very last drop. The benefits are significant, as no permits are required for these operations. The capital expenses related to tank houses, if needed, are minor in the grand scheme. Additionally, the carbon emissions are low, making this an advantageous approach in every aspect. That's why we are collaborating with other companies and Jetti, while also focusing on what we can do independently, as achieving this on our own allows us to capture the full economic benefits for our shareholders. This is a multifaceted opportunity, and as I mentioned, it brings a lot of enjoyment. It has injected a new level of enthusiasm into our entire organization, which is great to see.
Brian MacArthur, Analyst
I might be pushing it here. But just as a related thing, you also talked about North American staffing, asset efficiency of 200 million pounds. So that has nothing to do with any of this. That's independent. What actually is that part of the equation?
Richard Adkerson, Chairman and CEO
It's not just an issue for the mining industry. It isn't hindering our efforts to advance leaching, but it is a challenge that I hear about from other CEOs. Many are experiencing the same thing, which seems to have been influenced by COVID and the evolving work-life balance. This is a significant concern for us, and we are addressing it by actively recruiting talent and exploring how technology can reduce the labor intensity of our operations. However, it remains a major issue in the US, though not in Peru, Chile, or Indonesia.
Kathleen Quirk, President
But, Brian, it's basically getting our mining rates up and also getting our plant and processing to reliability standards consistent with what we've experienced in the past. Some of the experience levels have impacted us for the reasons Richard just talked about. But these are self-help items, and we've already got efforts underway to work on it and a game plan for how we're working on it. But it's an opportunity that we don't need to go do a major project to get. And so, again, the leach initiative, the initial leach initiative and this self-help work that we're doing are some of the highest value opportunities we have in the near-term.
Brian MacArthur, Analyst
Right. And while 1 billion pounds is equivalent to being one of the biggest copper mines in the world?
Kathleen Quirk, President
Yes.
Operator, Operator
Your next question will come from the line of Timna Tanners with Wolfe Research. Please go ahead.
Timna Tanners, Analyst
Good morning. I want to look at the opportunities we have in the near-term, particularly the leach initiative and the self-help work we are undertaking.
Kathleen Quirk, President
Hi, Timna.
Timna Tanners, Analyst
Thanks. I wanted to discuss slide five and the pace you've outlined to better understand the trajectory moving forward. It seems that the situation in Peru has significantly improved based on what we've heard. Is that issue fully resolved, and can we expect this performance level to continue? I know you mentioned ongoing labor concerns, but I assume we won't be anticipating weather-related disruptions. I would like to get more insights on the expected pace in the regions and any lingering effects on costs. Thank you.
Richard Adkerson, Chairman and CEO
Kathleen, I will begin by discussing the situation in Peru. There are various issues across different regions of the country. Our operations are located just outside the city of Arequipa, in the Arequipa region. While there were protests, they were not as significant as those in other areas. We did experience some temporary disruptions in personnel movement and supply deliveries. However, the situation in our area has improved. The overall issues in the country have not been fully resolved, and this remains an ongoing risk. It is important to consider the individual circumstances of each region rather than assuming that improvements in one area are representative of others. This business is complex, and the situation in Peru is particularly intricate.
Kathleen Quirk, President
Timna, you can refer to slide 26, which shows our quarterly sales volumes for the remainder of the year. The first quarter faced disruptions, and we also transitioned to tolling in Indonesia, which we anticipated. You can see our projected run rate for the rest of this year, and there is a strong recovery from the first quarter expected for the remainder of 2023.
Timna Tanners, Analyst
Anything on the cost side as a second part of the question, I had asked? Is that also kind of out of the woods for most of the group besides the labor issues?
Kathleen Quirk, President
In the first quarter, we reported $1.76, and we're forecasting an average of $1.55 for the year. Our unit costs for the remainder of the year will be lower than in the first quarter. We've mentioned that some inflationary pressures from last year are easing, primarily in energy, which saw a significant increase around this time last year. Other input costs that were impacted by the Russia-Ukraine situation have decreased as well, which is beneficial. However, we still face higher labor and service costs due to contracts for some of our equipment components that are still in effect for 2023. While we've experienced some cost relief, there are still areas where costs remain elevated. These costs are consistent with our initial estimates for the year, but they are still higher than last year.
Timna Tanners, Analyst
Got it. Thank you.
Operator, Operator
Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research LLC. Please go ahead.
John Tumazos, Analyst
Thank you for answering my question. Can you provide some details about the February increase in the $38 spot price for molybdenum? Was there a specific shortage involved? It seems some high purity customers may have needed access to good molybdenum. I noticed that the Spence concentrator started reporting molybdenum output to Cochilco for January, and it appears that Quebrada Blanca will begin in April and May. While you weren't the source of the supply increase, do you have any insights into where else the supply may have recovered when the price doubled? Thank you.
Kathleen Quirk, President
John, I'll comment, and Mike Kendrick can add to it. But partially, what happened in the first quarter was some of the same supply issues from moly that impacted copper. The situation in South America, particularly in Peru, did have an impact on supplies. At the same time, we were seeing some strong growth in demand. So there's extreme tightness in the first quarter, and some of that got relieved in Peru when things started to return to more normal operations. We continue to see, as we look forward, demand drivers for moly being positive in the supply side, which will fall a lot like copper is it's just a challenge to bring on new supplies. And many times, as you know, in a copper mine that has byproduct moly when people get into trouble with operating constraints. Copper is the one that people try to maximize, and sometimes may moly isn't maximized in those scenarios. But that was, I think, the main thing that occurred from a moly perspective on supply. And Mike, I don't know if you want to add. There are other things that we should add to that.
Michael Kendrick, Molybdenum Business Lead
No, I think you captured it very well, Kathleen. It really highlights how tight the physical market for moly is. As a result, there's no delay when there's a demand need in any given week, and if there's not enough supply, you can see both rapid increases and decreases throughout the system. Regarding your question on quality, we're a significant player in that area, and we conduct that business under contract. Most of our high-quality material is consistently designated for those products.
Operator, Operator
Your next question comes from the line of Michael Dudas with Vertical Research. Please go ahead.
Michael Dudas, Analyst
Good morning, Richard and Kathleen.
Kathleen Quirk, President
Good morning.
Michael Dudas, Analyst
As you indicated in your prepared remarks, you talked about observation two years ago. The market was in surpluses or balanced to maybe slight. And what you witnessing talking about other and the fact that this consolidation may take attention away from growth capital and to acquisitive capital. What do you think the risk a year from now that the market is there, upside or downside risk towards supply given those dynamics as you work through it over the next 12, 18 months?
Richard Adkerson, Chairman and CEO
You were breaking up a bit, but you were asking about the supply-side risk assessment, right?
Michael Dudas, Analyst
Yes, yes.
Richard Adkerson, Chairman and CEO
If we look back several years to when the projects currently coming online were first announced, there were expectations of significant surpluses for this year and 2024-2025. However, those projects faced delays for various reasons, including COVID, and the anticipated surplus situation is not materializing this year as markets are balancing. In 2024, there may be potential shortages, but there are no significant new projects expected to come online afterward. Therefore, I believe the supply-side risk leans more towards a downside. We have encountered challenges in meeting production targets, with projections often being optimistic for various reasons, such as the situation in Peru and operational issues similar to those we faced in Indonesia. Historically, supply projections tend to exceed actual outcomes, and that seems to be the case at present. We do have a leaching project that provides some potential upside, but overall, the risks appear to be more on the downside.
Michael Dudas, Analyst
Thank you, Richard.
Richard Adkerson, Chairman and CEO
Thank you, Michael. Appreciate it.
Operator, Operator
Your next question comes from the line of Matthew Murphy with Barclays. Please go ahead.
Matthew Murphy, Analyst
Hi. Just a question on the cash flow statement. Non-controlling interest distributions were zero this quarter, which I guess has happened a few times in the past, but what drives that? And in this case, should we assume that there's going to be a bit of catch up later in the year?
Kathleen Quirk, President
The first quarter, we had some significant taxes that we paid in the first quarter related to the prior year period. And so we did not have distributions in the first quarter as that was used to fund those expenses. But we do expect that you'll see that line item increase throughout the year. We're generating a lot of free cash flow at PT-FI and at Cerro Verde, and that those funds will be distributed. So in terms of thinking about it, we do provide some guidance on the impact of non-controlling interest on our net income and the estimates for cash flow are similar to that, maybe a bit lower than the earnings impact, but somewhere in that neighborhood.
Operator, Operator
Your next question comes from the line of Orest Wowkodaw with Scotiabank. Please go ahead. Orest, may be on mute. Our next question will come from the line of Lawson Winder with Bank of America Securities. Please go ahead.
Lawson Winder, Analyst
Thank you, operator. Good morning, Kathleen and Richard. Very nice to hear from you. Thank you for fitting in my question. I just wanted to touch on Chile where there's been some positive developments. Is the environment there now improving in the correct direction such that El Abra might look more promising for an expansion? And then could you just also please share your views on the outlook for the regulatory environment there for mining? Thanks so much.
Richard Adkerson, Chairman and CEO
It's still uncertain. While there have been some positive developments from our perspective since this process began, we are still waiting to see the final outcome. There are financial issues concerning royalties and taxes. Additionally, there are regulatory concerns about water usage and other environmental impacts. Overall, the situation is better than it has been, but significant uncertainties remain for us and other miners as we await the results.
Kathleen Quirk, President
We are currently taking steps to maintain flexibility in our plans. We are considering investments in desalination, which will not only help us extend our existing operations but also provide opportunities for a potential mill project. We are working on leaching, which may change our expectations regarding the design of the new expansion project. Therefore, we are keeping our options open and making strides to enhance that flexibility. The El Abra project is very promising. We are in the process of updating our capital cost estimates to align with current market conditions. El Abra holds substantial resources, and we are looking at possible increases in production there, as indicated in our slide presentation. This project is likely to proceed; the question is not if it will happen, but when. We are working to keep the analysis current and move forward with initiatives that will enable us to act swiftly when a decision is made.
Operator, Operator
Your next question comes from the line of Bendik Folden Nyttingnes with Clarksons Platou Securities AS. Please go ahead.
Bendik Folden Nyttingnes, Analyst
Thank you. Looking at that potential doubling in demand within a 12 to 15 year timeframe, what's your thoughts on taking on one of those large-scale resources in some of the more underexplored jurisdictions of the world and bring it forward as a greenfield project? Is that something you're looking at at all, or will you rather focus your strengthened balance sheet on the organic growth pipeline and potential industry consolidation?
Kathleen Quirk, President
We're really focused on our organic growth opportunities, and we believe our portfolio is fortunate to include growth that many in our industry do not have. Over the years, we've explored greenfield opportunities, but success in that area has been infrequent. While we're not dismissing the potential of greenfield projects and continue to keep an eye on them, our priority lies in our brownfield opportunities, particularly the leach opportunities we possess. As mentioned earlier, if we can realize this leach opportunity, it could significantly impact our top line. Therefore, we are concentrating on lower-risk, more certain brownfield opportunities while still monitoring greenfield options. We've invested a small amount in greenfield exploration, but given our pipeline and asset profile, our main focus is on brownfield projects.
Operator, Operator
Our next question will come from the line of Chris LaFemina with Jefferies. Please go ahead.
Christopher LaFemina, Analyst
Hi. Thanks, operator again. So, Kathleen, you mentioned the increases in CapEx guidance relate primarily to early investments in Bagdad for future expansions. I think back in October, Richard had said that investment in growth was on hold because, obviously, the macro environment was not very good. So I'm just wondering, has anything changed in Freeport's view of the world over the last six months? Is it just that China has reopened? Is it because supply issues are getting worse, or is there just no change, and this was kind of the natural progression for these projects? Thanks.
Kathleen Quirk, President
There hasn't been any significant change. This really highlights our optionality. The work we're doing, particularly the early projects, largely involves tailings infrastructure that we would need to develop eventually to support Bagdad's long-term mining plans. By advancing this work, if we choose to proceed with Bagdad, we can implement it more swiftly. However, we still face challenges at Bagdad, including economic uncertainties and issues related to housing and workforce for the project. Nevertheless, the accelerated tailings infrastructure will provide us with options moving forward. Ultimately, our focus is on maintaining flexibility within our portfolio to potentially act more quickly, even though progress doesn't happen overnight.
Richard Adkerson, Chairman and CEO
Having said that, and without underappreciating the uncertainties in today's world, I would say, for our industry, the economic situation has improved from where it was midyear last year. Throughout this, China's demand for copper in the second half of the year was strong. I believe it was the strongest second half that they've ever experienced. We're encouraged by the GDP growth in 2023. We recognize the comments about it being driven by consumers and that there are continuing issues. Inflation has improved. So I think the overall environment has improved in recent months. But as Kathleen said, that's not really what's driving our decisions. The Bagdad project faces worker issues, housing issues. Chile is restrained by continuing political uncertainties. But we believe all these projects will be needed by the world, they'll be very profitable for our shareholders. And so we're investing in them, planning for them, and anticipating that the time will come when we execute on them.
Operator, Operator
Our final question will come from the line of John Tumazos with John Tumazos Very Independent Research LLC. Please go ahead.
John Tumazos, Analyst
Thank you. Looking at slide 14, that includes the desalination plant, could you give us a little bit of background on that? It rains a lot, obviously, in Indonesia. Why were freshwater supplies not adequate? Could you have used saltwater for cooling? I'm assuming that most of the water is for cooling and the big smelter? Or is this sort of a community relations thing to not draw upon local water supplies?
Kathleen Quirk, President
We looked at a number of options, John. This is not a big part of the project in terms of capital requirements. We thought this was the best option for reliable water for the project. But Cory, I don't know if you want to add anything to that, but that was the thought process, but we did look into a number of options for water and designing the overall configuration.
Cory Stevens, Engineering and Project Development Lead
We thoroughly examined freshwater options. When making decisions regarding water, we consider long-term implications, including potential social impacts and future demands, as well as the renewability of these sources. Ultimately, we determined that desalination was the most viable option. Additionally, when comparing the capital costs of utilizing saltwater versus desalination, it became clear that desalination was the most sensible choice for us.
John Tumazos, Analyst
Thank you.
Operator, Operator
I'll now turn the call back over to management for any closing remarks.
Richard Adkerson, Chairman and CEO
We appreciate your participation and your interest. If you have further questions, contact David Joint, and we'll be happy to respond to them. We look forward to reporting in the future on our progress.
Operator, Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.