Earnings Call Transcript
FREEPORT-MCMORAN INC (FCX)
Earnings Call Transcript - FCX Q2 2022
Operator, Operator
Thank you all for joining us. Welcome to the Freeport-McMoRan Second Quarter Conference Call. At this moment, all participants are in listen-only mode. We will have a question-and-answer session later. I would now like to hand the call over to Ms. Kathleen Quirk, President. Please proceed, ma'am.
Kathleen Quirk, President
Thank you, and good morning. Welcome to the Freeport-McMoRan second quarter conference call. Earlier this morning, FCX reported second quarter 2022 operating and financial results, and a copy of today's press release and slides are available on our website at fcx.com. Our call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page 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 this 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. On the call today with me are, Richard Adkerson, our Chairman of the Board and Chief Executive Officer; Maree Robertson, our Chief Financial Officer; Mark Johnson, Chief Operating Officer of Indonesia; Josh Olmsted, Chief Operating Officer for the Americas; Mike Kendrick, who runs our molybdenum business; Cory Stevens, who leads our centralized technical services, engineering and construction; Rick Coleman, who's leading a number of our projects, including the smelter project in Indonesia; and Steve Higgins, our Chief Administrative Officer. Richard is going to make some opening comments to start us off, and then I'll come back and cover the materials in the slide presentation. So now I'll turn the call over to Richard for his comments.
Richard Adkerson, Chairman & CEO
Thank you, Kathleen. Good morning, everyone. I appreciate you joining us today. I want to start with a brief overview of Freeport's current status as a company. The second quarter was a mix of strong operations and a sudden, unexpected drop in copper prices. Our operations performed well; we achieved our production targets and our unit production cost target of $1.41, thanks in part to the success at Grasberg during our long-term effort to convert it to the industry's largest underground operations. Grasberg has regained its status as the second-largest copper mine and the largest single gold mine globally, accounting for 38% of our consolidated copper sales. In the second quarter, our unit costs at PT-FI were below expectations, and our gold revenue effectively covered our total operating costs. The success of this operation is a point of pride for our team associated with PT-FI. Our U.S. operations also showed positive results, and we maintain an optimistic outlook. As Kathleen will explain later, I couldn't be more proud of our global team's performance in the second quarter. We adhered to the financial strategy we set last year, targeting a debt range of $3 billion to $4 billion and determining cash flow allocations for dividends, share buybacks, and investments. We finished the quarter with a comparative debt level of $1 billion, with a separate $600 million of Indonesian debt. Our debt has decreased because we didn't spend as planned on expansions due to timing and market conditions. We have continued to pay our base and supplemental dividends, and we've bought back 48 million shares in the open market. Additionally, we repurchased $750 million of debt at a discount in the market. The Board has approved increasing our buyback authorization to 5 billion shares, with about 3 billion shares remaining. Our financial strategy remains solid, and we are executing well, but that is just one side of the story. The other side is the markets, which have changed rapidly and dramatically in the second quarter. Before this call, I revisited analyst commentary from the start of the quarter, which was overwhelmingly optimistic, with copper prices nearing $5 and projections for higher prices. We used a figure of $4.50 in our forecasts, but now we see prices just above $3.25. This dramatic reversal in market sentiment is notable. I noted the recent Bank of America survey indicating widespread panic among institutional investors, with the lowest expectations on record since 1995. Economic analysts are debating the severity of the downturn. At Freeport, we hope for the best but prepare for the worst. Our management team has successfully navigated previous downturns, all of which were followed by significant recoveries. This isn't our first experience with such situations; we have our strategy ready. Importantly, we have a strong balance sheet, which will help us handle the challenges ahead in this market. We will work to maintain our financial strength and protect our assets and growth opportunities for the promising future of copper. There is a disconnect between the current copper prices and the physical market today. From our perspective, the situation feels similar to when copper was at $4.50. Customers report strong activity, and copper inventories are at historical lows with no significant impact on physical demand thus far. Today's market is tight, and our strategy to be the world's leading copper company is still intact, based on the long-term demand and supply fundamentals for copper. However, the reality of the current copper price significantly affects our revenues and cash flows. The outlook remains uncertain, with analysts predicting a spectrum from a near-term recession to longer-term stagflation, while some foresee a less severe downturn and near-term recovery. Whatever unfolds, we believe the long-term prospects for copper are bright, and Freeport is well-positioned to benefit. The world is increasingly focused on electrification, with rising copper demand driven by efforts to reduce carbon emissions, such as electric vehicles and new power generation methods. According to S&P Global's Dan Yergin, a respected figure in the energy sector, a report predicts a doubling of copper demand due to the energy transition by 2035, alongside significant shortages. I encourage you to take a look at this report. With the established need for copper to support global economic growth, we are entering a new era of demand driven by energy transitions. However, new copper supply faces challenges, with no clear pathway for mine development to meet future demands. As a result, there will need to be more emphasis on scrap recovery, conservation, and expanded mining efforts, although these processes take years to execute. Ultimately, this will lead to higher copper prices, and the current copper price is not sustainable. Unless a global long-term economic collapse occurs, higher prices are inevitable. Now, Kathleen, I'll turn it over to you to recap the quarter and present our slides.
Kathleen Quirk, President
Okay. Great. Thank you, Richard, and I'll cover the presentation that's on our website, and then we'll come back and take your questions. Starting on Slide 3, we summarized the highlights of the second quarter. We achieved solid operating performance in the quarter and continued our momentum and executing our operating plans, growing our production year-over-year and managing costs in a challenging environment. Our sales volumes for copper were 17% higher than last year's second quarter and 5% above our recent guidance. We benefited from strong operating performance across the portfolio. Gold sales were 56% above the year-ago quarter and 18% above our April guidance, reflecting the exceptional performance at Grasberg. Our consolidated average unit net cash cost for the quarter of $1.41 per pound was in line with our guidance. Notably, Grasberg's costs were a net credit of $0.02 per pound in the quarter, meaning that the gold revenues more than offset all of our cash production costs at the site. We're actively engaged in cost management and efficiencies across the portfolio to mitigate cost increases. We generated adjusted EBITDA of $2.3 billion in the quarter. This was net of a $355 million reduction associated with copper sales recorded in the first quarter, provisionally priced at the end of March at $4.71 per pound, which remains subject to final settlement. The decline in copper prices during the second quarter resulted in a negative adjustment for these provisionally priced sales. Our adjusted net income totaled $854 million in the second quarter, $0.58 per share. That excluded net charges detailed on Roman numeral Page 7 of our earnings release, totaling $0.01 per share. Operating cash flows of $1.6 billion in the quarter exceeded our capital expenditures of roughly $900 million. Capital spending during the quarter included $400 million of major projects, principally associated with the Grasberg underground, and roughly $200 million to advance the construction of the Indonesian smelter. We took advantage of weakness in credit markets during the quarter and opportunistically repurchased debt in the open market. To date, we have purchased $754 million of FCX's notes in open market transactions at a cost of $718 million, including $582 million in principal amount in the second quarter. The current market situation provides a great opportunity for us to reduce absolute debt levels at attractive prices. We also continue to execute our share repurchase program since starting the program last November, we have purchased 48 million shares at a total cost of $1.8 billion, an average approximating $38 per share. Since the end of the first quarter, we purchased nearly $800 million in stock, including $110 million in July, which were executed at an average share price of $28 per share. Since reaching our net debt target in the middle of last year in the range of $3 billion to $4 billion, we have used approximately 50% of our free cash flow for shareholder returns. Today, we announced that our Board increased our share purchase authorization by $2 billion to refresh availability on the program to the $3 billion range. The timing of our future purchases will be dependent on our cash flows and general market conditions. We'll continue our priority of maintaining a strong balance sheet and using excess cash to return to shareholders. As Richard discussed, the magnitude of the decline in copper in recent weeks was sudden and unexpected. We have the balance sheet, asset quality and experience to successfully manage a volatile and uncertain market environment. Our net debt at the end of June was $1.6 billion. That included $600 million in net debt associated with the Indonesian smelter. Consolidated debt was $11.1 billion, and consolidated cash was $9.5 billion. We don't have requirements to raise capital in the current environment. We've been opportunistic and taken advantage of recent market weakness to repurchase our debt and equity securities. As we look forward, we will manage through the near-term effectively and are positive about our strategy centered on being foremost in copper, the strength of our assets, and our team focused on increasing value for all stakeholders. Moving to markets on Slide 4, we show a graph of year-to-date copper prices. The price 4 months ago hit a high of $4.87 per pound, with market analysts predicting multiyear periods of price increases based on fundamental rising demand required to support the energy transition, limited supplies and sizable deficits on the horizon. You've all read about the macro factors, which have manifested over the last several weeks, triggering recessionary concerns. In addition, concerns about the impact of COVID shutdowns in China and a strong U.S. dollar have weighed on copper, which is viewed as a close proxy for sentiment on the health of the global economy. The reality is that this has been a financially driven anticipatory move in copper prices. Physical markets remain healthy as evidenced by the global exchange inventories illustrated on this chart, which remain at historically low levels. Our customers report solid orders, and the industry continues to struggle to meet production targets. The current decline in price is below Wood Mackenzie's estimate of $4.25 per pound necessary to incentivize new supply under an accelerated energy transition. It will also provide less cash flow to the industry to develop new supplies, making the projected deficits in copper more significant in the future. The long-term secular demand trends for copper demand associated with electrification and decarbonization will be important demand drivers for copper. We see these trends being less economically sensitive than traditional uses of copper in the economy. We fully recognize the short-term uncertainties but have conviction about long-term fundamentals for the copper markets. Richard mentioned the S&P Global report. Many of you have seen it was published last week, prepared by analysts at S&P Global and led by Dan Yergin, a well-known energy industry expert, author, and historian. The independent study, which is available on S&P Global's website, forecasts above-trend copper demand through 2035 associated with electrification and the energy transition. The report projects long-term structural deficits in copper and highlights copper's prominent role in the global aspirations of a net zero economy. It confirms the work of other reputable analysts on the future of copper and will serve as an educational tool for governments and other policymakers on the importance of future new copper supply development. We recognize that the short-term macro is a different picture. And as we move to Slide 6, Richard highlighted this, it summarizes our experience in managing challenging environments. For those of you who have followed our company and industry for a long time, you know that our team is proficient and has successfully navigated challenging circumstances. This slide on Slide 6 summarizes our actions in prior periods when we took decisive steps to adjust our operating plans, reduce costs, defer spending, protect liquidity and preserve our asset values for improved market conditions. Notably, we operate all of our mines and manage major capital and operating decisions centrally. Each one of these periods had its unique challenges, and our team proved its agility each time. We're prepared to respond to a weakening market environment, if necessary. We're in a much stronger position than in past downturns with a significantly improved balance sheet and our successful expansion of low-cost production at Grasberg. Our team is resilient, experienced, professional, and value-driven in our approach. We can't predict the extent or timeframe of the current situation. But as a responsible producer of scale and a strategy focused on copper with long life reserves, the prospects are bright for our portfolio to become scarcer and more highly valued in the future. On Slide 7, we provide some additional details on our operating activities in the quarter. In the U.S., the Lone Star mine continues to perform above design capacity. We're expanding further to take us to 300 million pounds per annum by 2023 with an investment of approximately $250 million. As we accelerate the mining of oxide awards, this will expose a much larger sulfide opportunity at this site. We're also advancing and we're very excited about our leach recovery initiatives at Morenci; and across the Americas portfolio, using data analytics and new technologies to enhance our leach production. This is a significant value-enhancing opportunity for us, and we continue to gain momentum and expect to have success on this priority initiative. At our Bagdad mine in Northwest Arizona, we are advancing plans for the Bagdad 2X project to double production. Studies are advancing, and we're planning to advance early initiatives in parallel with the studies. We're focusing on developing this opportunity. It's a future growth option, but we'll be flexible on timing subject to market conditions. In South America, the teams have done exceptional work navigating the pandemic. We've had a significant milestone for the Cerro Verde team during the quarter, setting a quarterly record for concentrating of averaging 427,000 tonnes of concentration per day. At Cerro Verde, we also had some recent positive results on exploration, which has the potential to expand reserves and increase grades at this large-scale operation. At El Abra, we have increased stacking rates and commenced leaching on a new leach pad. We continue to evaluate alternatives for the long term at El Abra, including options for a new concentrator or an extension of existing operations, subject to ongoing monitoring of the investment climate in Chile. At Grasberg, we sustained our large-scale metal production after reaching our target metal run rate in the fourth quarter of last year. The cost position at Grasberg is exceptional. The team there is doing outstanding work in managing and sustaining the largest and most profitable underground operation in the world. During the quarter, we again achieved higher gold recoveries compared with forecasts, which contributed to a favorable variance for the quarter. We've now increased our outlook for full year gold production. At PT-FI, we are advancing mill projects to provide additional capacity in the second half of 2023. We're diversifying our power sources and advancing the long-term development for Kucing Liar. The construction of the new smelter in Indonesia is advancing. We reached an important construction milestone during the quarter, which will enable us to begin to reduce export duties later this year. Turning to Slide 8, we provide a 3-year outlook for our volumes, which are largely in line with our prior forecast. We've made small changes to our 2022 copper volumes totaling about 40 million pounds or about 1% and have increased our forecast for gold volumes in 2022 by about 5%. The execution of our long-term plans is on track after delivering a 19% increase in copper sales in 2021. We are projecting growth in volumes in 2022 and further growth in 2023. For 2022, we estimate 36% of our sales volumes will come from the U.S., 27% from South America, and 37% from Grasberg. Moving to our cost outlook on Slide 9. As I mentioned, we're actively engaged in cost management and efficiency initiatives to mitigate the impacts of the challenging cost environment. We've updated our plans to incorporate recent commodity pricing, exchange rates, and our latest operating plans. We're now estimating unit net cash costs for the year approximating $1.50 per pound for 2022. That compares with our prior estimate of $1.44 per pound. As you'll see from the reconciliation on Slide 9, the majority of this increase reflects the decline in by-product credits associated with a reduction in assumed gold and molybdenum prices for the balance of the year. Our projected $0.03 per pound increase in site production and delivery costs reflects the assumption of higher energy prices in our second half compared with our prior forecast, higher consumable costs, together with the impact of a change in estimate for copper in the maturing leach pad at El Abra. And this was partly offset by the favorable impact we have on labor costs internationally associated with weakening exchange rates compared to the U.S. dollar. Historically, copper prices have been correlated with a number of our input costs. Should recessionary pressures continue, historical correlations would indicate that we may begin to see a reversal of some of the cost experiences we've seen over the last two years. Moving to Slide 10. As one of the world's leading copper producers, our earnings and cash flows have significant leverage to the price of copper, up and down. On Slide 10, we show modeled results for our EBITDA and cash flow at various prices and have shown a broad range of prices this quarter, given the volatility ranging from $3 per pound of copper to $5 per pound of copper, which is close to where the prices were earlier in the year. We've updated our gold and molybdenum prices to reflect current prices. As Richard talked about, the current price is not sustainable long term given the cost structure of the industry and the need for new supply development in the future. We show modeled results on this slide using the average of 2023 and 2024 with current volume and cost estimates and holding gold flat at $1,700 per ounce and molybdenum at $16 per pound. Our annual EBITDA under these scenarios would range from over $6 billion per annum at $3 copper to $15 billion per year at $5 copper, with operating cash flows ranging from $4.5 billion per year at $3 copper to over $11 billion per year at $5 of copper. We show sensitivities on the right to various commodities and input costs. We can't predict prices and are prepared to manage in a low price environment. The long-term fundamentals of our business indicate that low copper prices are not sustainable longer term, providing increased cash flow as market conditions improve. We show the consolidated capital expenditures on Slide 11. These are largely unchanged from our prior guidance. We've reduced the 2022 capital forecast by $100 million, which is a timing variance for 2023. As you probably noted, we've been spending capital during 2022 at a slower pace than our original plans. In the current weak environment, we'll review opportunities to defer spending as we've done in the past. We have flexibility with our plans and benefit from the fact that the major investments required for the Grasberg transition are largely behind us and will begin to decline as we go into 2023. On Slide 12, we show our future growth options embedded in our asset base. We have multiple options for brownfield low-risk growth across our portfolio. Recall, we have 191 billion pounds of copper mineral resources in our portfolio in addition to our proved and probable reserves of 107 billion pounds of copper. The leaching opportunity is a major value driver opportunity for us, and it's not included in our reserves and resources. Success in this area will enable us to create the equivalent of a new mine with extremely low capital intensity, low incremental operating costs and, importantly, a low carbon footprint. We're continuing to apply covers to our leach stockpiles as the retention of heat is proven to enhance recoveries. We're using data analytics and evaluating various additives that can further enhance recoveries. We're initially targeting the addition of 100 million to 200 million pounds of new copper per annum within a relatively short time frame and believe we can build on this target with initial success. We currently estimate 38 billion pounds of copper in our stockpiles, which has already been mined but not in our reserves or production plans. A significant portion of this opportunity is at our flagship Morenci mine, the largest mine in North America. A cross-functional team of technical experts, metallurgists, mine planners, data scientists, geologists, and business analysts are working together to take full advantage of this exciting opportunity. We review the ongoing oxide expansion at Lone Star, which is progressing on schedule. Longer term, we have the massive Lone Star sulfide opportunity, a 50 billion-pound copper resource in our established mining area in Eastern Arizona. This project is right in our wheelhouse and is a valuable development option for the future. In the medium term, we're planning to double the size of Bagdad. We have a very large reserve position at the site. We expect to complete the feasibility study for this project in the first half of next year and would be positioned to start construction activities as market conditions warrant. The El Abra project has a resource approaching 30 billion pounds of copper, and we've done a lot of work in identifying an operation that could produce over 700 million pounds of copper per year. In parallel with our evaluation of a major expansion, we're also considering investments in water, which would extend the life of the existing operation while maintaining the longer-term growth option. We continue to closely monitor developments in Chile and are deferring decisions for the time being. In Indonesia, Kucing Liar project is a natural extension of our operations there and will allow us to continue large-scale, low-cost mining there for decades to come. The learnings and shared infrastructure from our successful development of Grasberg underground and the Deep MLZ really enhance the value of this project at Kucing Liar. We benefit from having a large pipeline of options and have flexibility on the timing of development of our projects, particularly the extensive options we have for development of new supply in the U.S., where we own most of our land and feed. We believe the world is going to need our projects in the future. We have a long track record of success in qualifying and developing projects in an efficient and responsible manner, enhanced by our industry-leading technical capabilities, established licenses to operate in our strong franchises in the areas of focus. I want to turn to our balance sheet on Slide 13, which our financial policy is centered around or centered around a strong balance sheet. The actions we've taken in the past have placed us in an exceptionally strong position, particularly in the context of current market weakness. We don't have a need to raise new capital for the foreseeable future. During the quarter, we took a number of steps which further derisked our balance sheet. We raised long-term financing for the smelter. We repaid our term loans at PT-FI and Cerro Verde, and expanded our bank credit facilities for these subsidiaries, and we opportunistically purchased over $750 million in senior notes at attractive prices. As we talked about, our net debt including $11 billion in total debt and $9.5 billion of cash. Net debt, excluding the smelter net debt was $1 billion and below our targeted net debt of $3 billion to $4 billion, providing a cushion in a weak market environment. We have an attractive debt maturity profile, as you'll see, with easily manageable maturities. We can continue to be opportunistic on value opportunities to repurchase debt in the open market. Slide 14, in closing, we show a scorecard of our shareholder returns, which have increased with our strong financial performance in recent quarters. We were active in the market in the second quarter and into July and have allocated approximately 50% of excess cash flows to shareholder returns since the third quarter of last year. And that consisted of $1.8 billion in share repurchases and common stock dividends totaling over $650 million during this period. Our Board authorized a $2 billion increase in our share repurchase program to restore $3 billion in availability under the program. We'll continue to prioritize our balance sheet as the cornerstone of our financial policy, and that will allow us to operate well in varying market conditions and drive long-term returns for shareholders. The discretionary purchases of our shares will be dependent on market conditions and cash flow generation in the future, and our Board will continue to review our financial policy on a regular basis. In summary, we're all focused on long-term value and executing our plans responsibly, safely, and efficiently. Despite the recent market conditions, we're optimistic about the value of our assets, the strength of our global team, the fundamentals of the copper business and the future prospects for the markets we serve. We appreciate your attention, and we look forward to your questions. Operator, we'll now open the call for Q&A.
Operator, Operator
The first question comes from Emily Chieng with Goldman Sachs.
Emily Chieng, Analyst
Good morning, Richard and Kathleen, and thank you for the update this morning. My first question is just around the 3Q copper shipment guidance. It looks like that's a little bit lower on a sequential basis than 2Q before it moves back up again. But could you perhaps point to what region may be driving that? And is that timing of shipments or perhaps something to do with the mine plan for the third quarter?
Kathleen Quirk, President
It's primarily a matter of timing. We sold more in the second quarter and produced more as well, but we also experienced some timing variances where our sales in the U.S. exceeded our expectations. In Indonesia, we reduced our concentrate inventory. So it’s mainly timing; we are currently operating at expected run rates.
Richard Adkerson, Chairman & CEO
And anyway, we do have challenges with timing in Indonesia from time to time with the shallow water port that we have there. Rough seas can just delay loading and we, of course, record sales at the time of loading. And so that's just something we've had to deal with over the years.
Operator, Operator
Your next question will come from the line of Chris LaFemina with Jefferies.
Chris LaFemina, Analyst
Hi, Richard and Kathleen. Thank you for taking my question. Kathleen, you mentioned historically, you mentioned your ability to kind of manage through the downturn, deferring spending as one option. Historically, Freeport in a declining price environment has taken high-cost capacity offline. And like we had a lot of cost inflation in mining, the cost curve appears to be steepening pretty dramatically. I'm wondering how much further the price would have to fall before you would consider taking some capacity offline. That's my first question.
Kathleen Quirk, President
I think what we're really examining is the tightness in the physical markets. As Richard mentioned earlier, inventories are low. We certainly do not want to produce at a loss at any of our operations, and we would prefer to keep our reserves in the ground for better market conditions in the future. However, the situation is dynamic, and it seems that the physical markets remain strong. We will be monitoring this closely, considering a combination of factors, including the impact of input costs. We evaluate production costs, capital costs, and cash flows on a mine-by-mine basis and will make necessary adjustments. The first adjustments may involve deferring some capital projects, which could affect copper volumes in the long run, but we will carefully assess all conditions. As mentioned, we manage everything, so we have control over these decisions and can quickly evaluate the portfolio's status. We are ready to make modifications, but I don't want to provide a specific projection. We have previously reduced copper production, especially when demand has decreased.
Chris LaFemina, Analyst
And you talked about the market being physically tight. You can see that in the inventory data. It's a little bit perplexing though, because the Chinese macro got so bad in the second quarter due to the lockdowns. And presumably, Chinese demand materially weakened. The underlying demand must have materially weakened there. There's been year-over-year in the second quarter fairly substantial supply growth on the two biggest mines in the world, including your own, had pretty big production growth year-over-year. A lot of companies are lowering their production guidance. But the second quarter looks like a quarter where you had an increase in supply and potentially a collapse in Chinese demand, yet inventories didn't really change. So I'm just trying to reconcile what might have happened. Do you think the Chinese may be buying copper for strategic reserves? Or is there something else going on in the market that would explain why it's staying relatively tight despite the biggest end market potentially seemingly imploding in the last quarter?
Richard Adkerson, Chairman & CEO
Well, Chris, in preparing for this call, I have made a concerted effort with my contacts in the industry, who are very knowledgeable about the business in China. To answer your question directly, I inquired broadly about the visibility of inventories in China and the status of Chinese commodity trading companies. The feedback I received indicated that inventories were not building and the trading activity was not unusual. While a couple of our mines and other major mines saw increased production, there were also some disruptions in Latin America during the quarter that seemed to balance out the Chinese demand issues. However, we don't see any impact on demand from our customers in China—who are part of a diverse customer base in Asia. We don't sell all of our copper to China; we also supply Japan, South Korea, and Taiwan, and we have not noticed any demand changes. I understand your question, and I wanted to share what I've been able to gather, but we are not observing anything unusual in our business.
Kathleen Quirk, President
Western world has been strong as well, Chris. So that's been different than in past years.
Richard Adkerson, Chairman & CEO
Right. Even in Europe, our business there is strong. And I know the uncertainty space in Europe over this energy situation, so I'm not diminishing any of that. It's just our business is strong, as many customers over there are avoiding Russian copper. And so it is unusual, as I talked about. It is a disconnect. It's a serious disconnect right now between the physical marketplace that we're seeing and what's going on with copper prices.
Operator, Operator
Your next question will come from the line of David Gagliano with BMO Capital Markets.
David Gagliano, Analyst
Chris mentioned the point I wanted to ask about, which is the timing. Historically, in 2008 and 2009, copper prices fell to around $1.50 when Freeport took action. Similarly, in 2015 and 2016, prices were around $2 to $2.50. Considering the cost pressures we've experienced, is it reasonable to consider a price range of $2.50 to $3 per pound as a potential trigger for more activity at our current assets?
Richard Adkerson, Chairman & CEO
In response to your earlier question, I think it’s clear that Freeport operates a diverse range of assets with varying cost structures. This was the main reason for integrating Grasberg with the Phelps Dodge assets, as it enables us to manage these resources more effectively. Historically, during challenging times, we have utilized Grasberg to cover our corporate general and administrative expenses as well as our debt financing. Each mine is tasked with maintaining at least a cash flow breakeven, and we evaluate this on a mine-by-mine basis, making decisions to support that goal. For instance, when we consider larger operations like Morenci, the largest mine in North America, we recognize that they function individually, yet their performance is influenced by current economic conditions. It involves careful decision-making as these choices impact not only that specific mine but also the entire operation. We manage all these sites as a unified business in the Americas. Our team collaborates to identify what is effective and what is not, ensuring we align long-term strategies with immediate realities. We have a consistent team that is familiar with these challenges, and our operators are proactive, working together to achieve our corporate goals. It’s complex to pinpoint a specific price at which certain actions regarding a mine would be triggered, as it is an interconnected decision-making process across all our American mines. Meanwhile, in Indonesia, we continue to prioritize safe and aggressive production in line with our long-term plans. It's encouraging to see our progress now, especially compared to two years ago when volumes were low due to COVID. We are in a much better position now.
Kathleen Quirk, President
And David, you raised this in your comments, and we look at a lot of the publications that show where cost support is for copper. Those estimates are dated. There've been a lot of changes in input costs that the historical cost support for copper has been increased significantly. So $3.25 copper is not the same as it was 2 years ago. And so that's a factor as well. But reading tea leaves about how long this will last, we can move quickly. This has happened suddenly, and we're starting a process to look at what we can do, particularly on the capital spend. That's the quickest way to increase cash flow.
Operator, Operator
Your next question will come from the line of Lawson Winder with Bank of America Securities.
Lawson Winder, Analyst
Hello Richard and Kathleen. It is very nice to hear from you. As always I hope you both are well. I just wanted to kind of dig down on your comments regarding the increase in the cash cost guidance, Kathleen, you mentioned it was a majority of the forces driving that were actually just a reduction in the by-product price assumptions. I was getting to that too, though, I was getting to a very small majority, almost close to 50-50. We happen to have a specific number in terms of how that broke down between inflation and the change in the price assumption? And then maybe if you could just speak to some of the key, I guess, unexpected inflationary items that you saw in the quarter.
Kathleen Quirk, President
On Slide 9, we demonstrate a roll forward, highlighting an increase from $1.44 to $1.50 in by-product credit due to the use of lower gold prices and a decrease of $0.05 in moly compared to our previous forecast. This results in a $0.06 increase, with $0.05 attributed to the reduction in by-product credits. The site production delivery has risen by $0.03. Key factors impacting our cost guidance include energy costs. In our last forecast, we referenced diesel prices at $3.50 per gallon, which were accurate at that time. However, actual prices in the second quarter exceeded $4 per gallon, later decreasing to around $3.70 per gallon according to our current outlook. We are basing our forecasts on current diesel prices, approximately $3.70 per gallon. Additionally, coal prices have risen since our previous forecast, and purchase power costs have increased slightly, although stronger dollar offsets helped lower operating costs in our international locations. We've also accounted for contractual consumable price increases in our forecast. Transitioning in the lab from an old leach pad to a new one prompted updates in our estimates of remaining copper in the old pad, which is not a cash item but affects our unit net cash costs. Overall, the main contributors include energy materials, supplies, and a deal at El Abra, with effects balanced by a stronger dollar. Profit sharing and other costs linked to copper prices have also played a role. In summary, we have noted a $0.03 increase in site production and delivery while export duties and royalties decreased by $0.02. The primary driver essentially reflects the changes in by-product credits, with previous gold price assumptions at $1,950 adjusted to $1,700, and moly prices dropping from $19 to $16.
Richard Adkerson, Chairman & CEO
And growing volumes in Indonesia. I mean, with that cost structure, when it gets to be a greater proportion of consolidated numbers, that's a huge benefit.
Operator, Operator
Your next question will come from the line of Carlos De Alba with Morgan Stanley.
Carlos De Alba, Analyst
Yes, good morning, Richard and Kathleen. A couple of questions, if I may. First one, it seems that the leaching technology could be a very attractive return on investment for you. So I wonder if you can give maybe a little bit more color as to what the current status there? What are some of the work that is still pending to do? And if you have any sense of potential timing for that investment to materialize? And then the other is, clearly a lot of volatility, as you mentioned, and copper prices have suffered. Since you are quite constructive on the market, this might be an opportunity. So this is maybe a sensitive topic, but what is the rationale of keeping Cerro Verde as a policy traded company? I mean, wouldn't it potentially be that also a good investment for Freeport shareholders?
Kathleen Quirk, President
Carlos, in response to your first question about leaching, this is our top project and is pivotal for enhancing our business. As you pointed out, it involves low capital intensity and very low operating costs. Given the current climate, we are particularly driven. We are managing it as a project with focused teams, making it our number one priority. There's a research and development aspect to it, so it's not just about execution. We are deepening our understanding of the science involved. Our company and its predecessors have been leaders in this field, and we have a team with extensive experience along with new approaches that will contribute to our success. Cory Stevens is leading this initiative, supported by Josh and the entire Americas team. Cory, if you have any additional comments to add to what we discussed earlier, please share. His phone often rings because we view this as a significant opportunity to generate value for our business and shareholders. Cory, is there anything else you'd like to include?
Cory Stevens, Director
No, thanks, Kathleen. Yes, reaching really offers several compelling advantages across various areas. The analytics capabilities are providing a more detailed view of all the different aspects of recovery, allowing us to transition from static recipes used in the past to more dynamic recipes that maximize value moving forward. This is just one area of focus and it's very organic. At Morenci, we're currently focusing a lot of our attention there. We're working towards the moderate volumes we projected in this year's forecast, which is building confidence in what sustainability looks like going forward. Additionally, we have numerous activities planned to enhance growth, supported by a significant backlog of alternatives we are exploring.
Kathleen Quirk, President
Thank you, Cory. We're exploring data analytics and additives, as well as applying heat across all of our stockpiles. We're making good progress in this area. The data indicates that by retaining heat in the stockpile, our recoveries improve. This approach is multi-faceted, and we are initially focused on Morenci, with Chino being the second largest site in the U.S. where we're implementing data analytics. We're testing additives at Sierrita and have some third-party activities happening at our Bagdad mine in Arizona. We're experimenting with various alternatives to deepen our understanding, and we’re gaining confidence in achieving our target of 100 to 200 million pounds over a 12 to 18-month period. We're enhancing our ability to reach that goal, which will then allow us to explore further opportunities. However, it's important to achieve initial success first, and we've had some early wins, but scaling these efforts is key. Stay tuned. As for the second question on Cerro Verde...
Richard Adkerson, Chairman & CEO
Well, let me just add. The real focus is what Kathleen and Cory talked about is taking advantage of our existing leach operations. But with success, the future beyond that is really exciting about what we might do in terms of mining sulfide ores and processing them with this technology or looking at historical lead stacks. It is really exciting. Our whole team is really pumped up about it, very good to see. Our project is called leach to the last drop.
Kathleen Quirk, President
And just to circle back on Cerro Verde, we monitor the share price there, the public share price there. The public float is a historical carry forward that has been in place for a very long time, but we do monitor the trading conditions, opportunities if they arise and being able to repurchase. It's a different scenario than in the U.S. where we can have active share purchase programs. But we are in tune with the market there and with certain of the investors. We'll look at that on an opportunistic basis as we compare uses of cash flow with other priorities at the corporate level.
Operator, Operator
Your next question will come from the line of Michael Dudas with VRP.
Michael Dudas, Analyst
So Richard, we've experienced some dislocation over the past six to seven weeks, which has confused many people. Additionally, the recent S&P year-end report you mentioned was published a few weeks ago. Typically, these kinds of market corrections or uncertainties can lead to significant delays in decision-making and in getting supply to the market. Is this situation going to cause a pause, or is the belief in long-term confidence strong enough to continue these discussions? Clearly, you’re evaluating it in a very careful manner. However, given our industry's history, it's likely we will see continued pressure on inventories and shortages, as this type of anxiety could result in further delays in necessary investments for the product.
Richard Adkerson, Chairman & CEO
The impact on corporate strategy and the availability of financing for smaller projects will contribute to the existing barriers to supply development that the industry has already encountered. Additionally, we have a significant project in Chile that is currently delayed due to political factors and uncertainties regarding taxation. When we consider the possibility of buying back our stock at such low prices, this is likely to influence our actions. Investment in this industry is inherently long-term, even for projects like doubling our concentrator at Bagdad, which involves an extended timeline for permitting, planning, and procurement. The long-term nature of this business means that significant fluctuations in prices will affect investment decisions. No company can simply ignore the current market conditions; the recent dramatic decline and ongoing uncertainties will inevitably postpone production investments. With a limited number of available investments, we are heading towards a significant deficit in the copper markets.
Operator, Operator
Your next question will come from the line of Timna Tanners with Wolfe Research.
Timna Tanners, Analyst
I guess I'm just trying to kind of square that what we've been discussing in terms of Freeport Slide 12 in terms of all those projects. What does it take that you need to see from the Chilean politics to get more confident in El Abra? And what does it take in terms of copper prices just generally to proceed? Or are many of these still very attractive at recent prices?
Richard Adkerson, Chairman & CEO
Thank you for the question, Timna. In assessing our situation, we face a lot of competing economic factors for these projects. The uncertainty at El Abra, where we hold a 50% interest and operate alongside Codelco, is a challenge for that project. In contrast, our investments in the U.S. benefit us significantly since we own the majority of our landing fees and do not have to pay royalties. Our favorable income tax situation is partly due to current tax legislation and the net operating loss carryforward from our oil and gas investments. Community support and requirements for international operations also play a role in this balance. Kucing Liar fits clearly into our long-term strategy for managing available ore. Regarding Grasberg, we are in initial discussions about extending the 2041 deadline. We believe there is a potential path forward that could benefit all stakeholders and allow for further exploration in that area, which has been restricted by the existing deadline. It's difficult to give a straightforward answer since it involves balancing various elements. Currently, the focus on leaching will be influenced by economic conditions and developments at the Bagdad and Lone Star projects. Near-term expansions are progressing well with additional opportunities available. The sulfide projects are more long-term, and El Abra is facing significant challenges. Nonetheless, we have further opportunities in the U.S. at Morenci and other mines. One of the strengths of our company is our extensive pipeline of projects. While our nearest-term projects may take time, we have excellent resources that will eventually become reserves. Our company is capable of sustaining operations for a long time without needing to pursue other avenues. However, decisions about timing and when to proceed are complex and have been further complicated by the recent 30% drop in copper prices and uncertainty about global conditions over the next 2 to 3 years. This situation has affected us and will impact other companies as well.
Operator, Operator
Your next question will come from the line of Abhi Agarwal with Deutsche Bank.
Abhinandan Agarwal, Analyst
Good morning, Richard and Kathleen. I just had a question on inflation. So in terms of inflation, where do you see the biggest upside risk into the year-end and 2023? And you did talk about using spot gasoline prices and including labor in your forecast. But does the Q3 and the 2022 guide reflect the spot consumable prices you are seeing? That's my first question.
Kathleen Quirk, President
The first answer is yes to that. We're using spot prices for our energy inputs.
Richard Adkerson, Chairman & CEO
Yes. Our overall planning philosophy involves developing an outlook and plan based on current prices while considering various scenarios for potential variations. We refrain from engaging in economic analysis. Our sales team forecasts the future, and I've learned that such predictions can be unreliable. Thus, we rely on current prices and examine different scenarios. For those familiar with our company, you know there's historically been a connection between our input costs and copper prices, which has informed our decision not to hedge. However, the current market conditions have disrupted these traditional relationships, particularly with energy, which is evolving rapidly. We are handling this situation with caution, aiming to protect our valuable assets and the promising future we envision for our company. We are entering a phase where we actively manage our business in response to the changing environment.
Kathleen Quirk, President
In response to your question about where we identify the most risk or opportunity, I would highlight energy as the area with the greatest uncertainty. As Richard mentioned, there is a correlation between our energy spending and historical data, indicating that if we look back over a long period, energy costs correlated to a $3.25 copper price would be 40% lower or greater. Despite this, there are discussions about energy prices potentially spiking again due to global events. However, if we do experience a recession, it may lead to historical correlations becoming more relevant than they are currently. Our current plans are not based on these historical correlations but are instead focused on present market conditions.
Operator, Operator
Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research LLC.
John Tumazos, Analyst
We’re in such a strong position at Freeport and given the two big capital projects, the smelter and Kucing Liar basically non-discretionary, but we really don't need to make too many changes lay off geologist paying CapEx around a lot and that there's less risk of a double mistake of making all these cuts and then the market recovering, panics, start and stop so fast, it's so hard for you to manage. Do you think it's very likely we're steady state at Freeport?
Richard Adkerson, Chairman & CEO
We made significant personnel cuts just over two years ago due to the COVID situation. During that time, we aimed to treat our employees fairly, primarily through incentivized retirements and terminations. We implemented some effective cost-saving measures in our general and administrative expenses, particularly by reducing travel and improving efficiency. I encourage everyone to review the history of Freeport's G&A to see the progress we've made. We're actively seeking technical personnel and are not looking to reduce this segment because of the opportunities presented by leaching and data analytics in our business. From my experience, good technical staff can create significant value. Currently, with the ramp-up of Grasberg and ongoing mill enhancements and power issues, we are operating at our usual run rate. However, expansion plans are being influenced by the current copper prices. Our main focus is to maintain a strong financial position, keep our options open, and be ready to act when the timing is right.
Kathleen Quirk, President
We have secured the necessary capital for the smelter, which is a crucial part of our agreement with the Indonesian government. Earlier this year, we successfully raised funds in both the bond and bank markets before conditions worsened. Overall, we are in a good position. The Kucing Liar project involves complex execution but is fundamentally an execution project. This project represents a long-term investment, and while we can adjust our plans based on potential ups and downs, it remains focused on the long haul. In the short term, we are reviewing some of the funding we had set aside for various capacity-building projects in the Americas, which are essential for maintaining higher mining rates and sustaining our production levels. If necessary, we will consider reducing spending as we have in the past. While cutting mining rates can improve current cash flow, it can also complicate future production recovery, similar to the challenges we faced after our cutbacks in 2020. We take all these factors into consideration when adjusting our operational plans.
Richard Adkerson, Chairman & CEO
The timing of that PT-FI $3 billion financing was very fortuitous. I was just looking at this this morning and what we issued it with and what today's interest rates are for those bonds that are trading. It was great that Kathleen and our team have done when they got it done.
Operator, Operator
Our final question will come from the line of Jatinder Goel with Exane BNP Paribas.
Jatinder Goel, Analyst
Just a question on inflation, but from a different perspective. A number of other companies in the sector are highlighting CapEx inflation being higher than OpEx inflation. Interestingly, encouragingly, your CapEx guidance is almost unchanged for this year and next year, barring some $100 million shift. What's driving that? Are you seeing any CapEx inflation? Or is there any deferral of activity keeping that absolute $3.1 billion average CapEx slide unchanged, but it's at the cost of some lower activity level?
Kathleen Quirk, President
Yes. I think it's a function of where we are in these projects. In Indonesia, a large portion of our capital budget was related to the underground development. We were well advanced in this project. The last part of it really is this increase in our SAG milling circuit, which is coming on in Q3. But if we're starting projects today or in the last 6 months, I think that's a fair assumption. That also goes into the calculus of is this the environment that you want to undertake major new projects in because not only do you have the costs up, but the availability of labor, to someone's question earlier, is that the risks are higher. The current copper price doesn't appropriately reflect what is required to get new projects developed. That is the thing Richard was talking about earlier, where we've got a big disconnect. Our capital projects that we're doing today have been in progress for a long time. We've got a core amount of sustaining projects, and we do have some higher equipment and parts and those kinds of things. Some of the parts have affected OpEx. Given where we are in our capital cycle, we don't have the inflation that someone brand new starting a new project would have today.
Richard Adkerson, Chairman & CEO
It's about what we're investing in and our position in the cycle. Supply chain challenges are still significant, which is daunting when considering a new $6 billion to $7 billion project in this industry. The barriers to develop copper to satisfy demand are substantial. We've faced high copper prices for 20 years, and despite efforts to invest and develop resources, the new developments must navigate community and environmental concerns. In Latin America, there are social issues that complicate matters, and while we benefit from greenfield expansions in the U.S., there are still serious challenges with brownfield expansions. The obstacles to building new projects are unprecedented. Observing our commodities and resource businesses over the decades has given me a clear view of the copper business and the promising future ahead. I am excited about the benefits our companies will gain from our assets, experienced people, and methodologies. The future looks bright.
Jatinder Goel, Analyst
Excellent. Just a quick follow-up. On the smelting CapEx, the only change has been in the precious metals, refinery side. Is all of the remaining CapEx on existing smelter expansion plus the new greenfield smelter all locked in, and there is no risk of escalation there, just to be sure?
Kathleen Quirk, President
No, it's not.
Richard Adkerson, Chairman & CEO
No.
Kathleen Quirk, President
Yes. We agreed with the EPC contractor to a target price, and we both share some risk in that. We've got some contingencies, a good portion also when you think about the labor cost, local labor costs, and where the dollar is. That will help us if things stay with the way they are. But it's not a fixed-price contract. It's got some risk-sharing between the parties.
Richard Adkerson, Chairman & CEO
Hello, everybody. We've had long conversations and just the connections we have with the people at the EPC contractor to manage this. We've built a good relationship over the years, and done a remarkable job executing that project in such a tough environment.
Operator, Operator
I'll now turn the call back over to management for any closing remarks.
Richard Adkerson, Chairman & CEO
Let me just express my thoughts on the foundation of our company's strategy. If anyone on this call, especially those who follow our company closely, has a different perspective on the fundamental outlook for the business, please reach out to me directly. I would be very interested in hearing your insights. I recognize that even institutional investors tend to focus more on the short-term, unlike Freeport, which is committed to long-term investment in our copper business. I welcome any differing views you might want to share. Thank you all for your time. We're excited to report next quarter and see how the future unfolds. It will be very interesting. Thank you.
Operator, Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.