Earnings Call Transcript
FREEPORT-MCMORAN INC (FCX)
Earnings Call Transcript - FCX Q2 2020
Operator, Operator
Ladies and gentlemen, thank you for your patience. Welcome to the Freeport-McMoRan Second Quarter Conference Call. Currently, all participants are in a listen-only mode. We will later have a question-and-answer session. I would now like to hand the call over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please proceed.
Kathleen Quirk, CFO
Thank you, and good morning, everyone. Welcome to our conference call. Earlier this morning, we reported our second quarter 2020 operating and financial results. A copy of the press release and slides are available on our website. Our conference call today is being broadcast live on the Internet. Anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today’s call, and a replay of the webcast will be available on our website later today. Before we begin our comments, we would like to remind everyone that today’s press release and certain comments on the call include forward-looking statements, and actual results may differ materially. We’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 2019 Form 10-K and quarterly report on Form 10-Q, each filed with the SEC as updated by FCX's subsequent filings with the SEC. On the call today is Richard Adkerson, Vice Chairman and Chief Executive Officer; Red Conger is on the call, as well as Mark Johnson; Steve Higgins, Rick Coleman, and Mike Kendrick. I'll start by briefly summarizing the financial results and then turn the call over to Richard who will be going through the presentation materials. As usual, after our prepared remarks, we'll open the call up for questions. Today, FCX reported net income attributable to common stock of $53 million, or $0.03 per share in the second quarter of 2020. The results included net credits of $9 million or roughly $0.01 per share, primarily associated with favorable metals inventory adjustments and an income tax credit, which were mostly offset by COVID-19-related costs and employee separation programs. Adjusted net income after these special items totaled $44 million or $0.03 per share in the second quarter. Our adjusted earnings before interest, taxes, and depreciation for the second quarter totaled $754 million. That was above our July 6 estimate of approximately $650 million, primarily reflecting slightly higher sales volumes in the quarter and lower costs than our prior estimates. Copper sales during the second quarter were 759 million pounds. That was about 10% higher than our April 2020 estimate. That reflected better than anticipated production rates in Indonesia and North America, and the timing of shipments from Cerro Verde. Our second quarter gold sales of 184,000 ounces were 12% higher than our April 2020 estimate, reflecting a strong performance in Indonesia. The average realized copper price during the quarter for copper was $2.55 per pound. That was below the year-ago quarterly average of $2.75 per pound, while gold realized prices averaged $1,749 per ounce during the second quarter, above last year's second quarter of $1,351 per ounce. Consolidated average unit net cash costs averaged $1.47 per pound in the second quarter of 2020. That was lower than the year-ago quarter and also lower than our April 2020 estimate of $1.63 per pound, reflecting the higher copper and gold sales volumes and strong execution of our cost reduction initiatives. We generated strong cash flows during the quarter, totaling $491 million in cash flows from operations and funded capital expenditures totaling $527 million during the period. We ended the quarter with consolidated debt totaling $9.9 billion, and consolidated cash totaled $1.5 billion, with strong liquidity and no borrowings under our $3.5 billion revolving credit facility. Now, I'd like to turn the call over to Richard who will be referring to our slide presentation materials. Richard, please go ahead.
Richard Adkerson, CEO
Thank you, Kathleen. Good morning to everyone, and we appreciate your participation in our call today. I hope you and your families are safe and well. The past four months have been very challenging, with intense work and difficult circumstances. I am proud of our team's discipline and perseverance through these trying times. We've encountered numerous issues, but this quarterly report reflects great news for our Freeport team and the excellent work we've been doing. At Freeport, we are committed to prioritizing the health and safety of our workers while also supporting the communities where we operate and meeting our customers' copper needs. In late April, we outlined a comprehensive plan for our stakeholders to address the COVID-19 health and economic challenges, ensuring the safety of our personnel and safeguarding our business for a promising long-term future. Over the last three months, I have been extremely proud of how our team has responded to this plan and crisis, making tough decisions during an unprecedented time and executing those plans safely with commitment and cooperation. We acted with urgency to reduce costs and capital spending, which is reflected in our second quarter results and annual guidance today. While worker healthcare management has been impacted, I'm pleased that our team has also excelled in safety performance during the quarter. It’s encouraging to see that, despite the distractions, we have maintained safe production, adhering to strict protocols, enhancing protective equipment, and investing in testing and isolation measures. We’ve had few serious illnesses among our staff, and most of those who encountered the virus have recovered. We remain focused on maintaining global health standards and ensuring the safety and well-being of our workforce. Other than the restrictions imposed by the government at Cerro Verde, the pandemic has had limited impacts on our operations. We are aware of how quickly the virus can spread and remain dedicated to protecting our people. In April, we implemented our plans to navigate the weak market environment by reducing costs and capital spending by over $2 billion, cutting about 15% of our planned copper production and closely managing all expenses, including G&A and exploration. The effectiveness of our plan is evident in our second quarter results, which exceeded our revised forecasts. Our sales volumes for copper and gold surpassed our April guidance, all achieved safely despite the global crisis. Copper prices have risen considerably this quarter. Our plan was based on a $2.30 per pound copper price, and we had contingencies for even lower prices. Although prices are higher now, we will continue to exercise discipline and adhere to our cost containment strategies, as we believe this is prudent given the ongoing uncertainties of the pandemic. We remain committed to creating long-term value from our assets. I will soon share more about our progress at Grasberg, where our team continues to excel in operations, which is vital to our long-term strategy. We are on track to ramp up sustainable production volumes of copper and gold. Our team has consistently met or exceeded forecasts, and I am happy to report we are making good progress with our ramp-up plans. I also want to highlight the exceptional work of the Cerro Verde team in restoring operations near Arequipa, Peru. By June, we operated at 80% of 2019 levels and are increasing productivity with protocols in place to protect both workers and the surrounding community. At our Lone Star project in Eastern Arizona, we made good progress this quarter and are now commissioning the project. We are also enhancing our balance sheet by extending maturities at favorable rates, ensuring we maintain liquidity. All these efforts have safeguarded our business during this period of uncertainty and have left us well-positioned for the upside we see ahead. Our long-lived and durable reserve base, along with our premier position in copper and significant exposure to gold markets, will make our assets even more valuable for our shareholders in the future. We have a deep commitment to our communities, which we recognize as crucial to our long-term success. Throughout this period, we have supported our communities with medical supplies, food, and monetary assistance, reinforcing our bonds. We remain focused on our stakeholders, balancing our responsibility to shareholders with our commitments to workers, communities, and the environment. Our sustainability efforts are highlighted in our recent reports, including our first climate report that outlines our approach to climate-related risks and opportunities. Copper plays a pivotal role in addressing global climate challenges, and its demand will only grow. As we see signs of recovery in the global economy, particularly in China, we anticipate increased copper demand. The pandemic has affected supply chains and inventories, which have remained low—a positive indicator for future copper pricing. We will proceed cautiously until we have clarity on economic conditions but remain optimistic about copper’s role in the ongoing recovery and necessity for new projects. Moving forward, copper will be essential for decarbonization efforts and technological advancements. The pandemic has emphasized copper's role in public health, and our expertise in copper operations positions Freeport strongly to benefit from these trends. At Cerro Verde, we faced challenges due to government restrictions but have improved production capacity significantly. Our plans for the remainder of the year assume production at consistent rates, and we have shown proven capability for higher production when conditions allow. At Grasberg, our underground ramp-up is progressing well, with average daily ore production exceeding our expectations. By the end of this quarter, we reached a production rate of 70,000 tons per day, with expectations to exit the year at 95,000 tons per day. Our progress is a result of over 15 years of investment in this program. Our teams have also made significant strides regarding our proposed new smelting facility, though progress is hindered by COVID-19. We continue to liaise with the government regarding an extension for the project's completion timeline. We are confident in managing ongoing challenges and are proud of the progress made toward our long-term goals. We remain optimistic about our future, wherein we aim to double our EBITDA and strengthen our balance sheet to provide substantial returns to shareholders. I am immensely proud of our organization and the dedication shown by our team. Their resilience and commitment inspire me, and I am grateful to be part of this company. We are resolute in our mission to succeed for all our stakeholders.
Kathleen Quirk, CFO
Great. Thanks, Richard. And I'll just briefly review our financial outlook, beginning on slide 17, and then we'll take your questions. On slide 17, we're summarizing our sales outlook for 2020 through 2022. As Richard indicated, our global team is performing at a high level. We've increased our 2020 sales outlook by about 60 million pounds of copper and 50,000 ounces of gold, reflecting the strong second quarter performance. As reflected in the charts, our sales volume estimates are expected to grow by over 20% in 2021 and 30% in 2022 compared to 2020 levels. Notably, volumes in 2022 are expected to increase by nearly 1 billion pounds of copper from 2020 levels. This reflects the projected addition of volumes from Grasberg as we move toward design capacity and the increased Cerro Verde volumes as we continue to restore full production levels. Our gold volumes, as I said, in 2020, are slightly above our prior estimates and are similar to the guidance that we provided for 2021 and 2022. For moly, we've adjusted the sales outlook slightly to better match our supply with current market conditions. We show on the next slide, slide 18, our volumes by quarter. And as you'll see, we're expecting a strong second half with sales increasing throughout the year. You'll note that by the fourth quarter, we're very close to our 2021 run rate for annual volumes. Our teams remain very focused on executing the plan safely and finishing the year strong. Turning to costs on the next slide, slide 19. You can see we moved very quickly in March and April to adjust our cost structure. We modified our mine plans to reduce mining rates and to reduce higher-cost production, and we successfully implemented a series of cost-saving initiatives to drive long-term benefits. As Richard mentioned, in addition to the operating cost reductions, we also took steps to reduce overhead and exploration costs, and those initiatives were also successfully implemented during the second quarter. We reduced our North American mining rates in the second quarter by about 25% compared to the year-ago quarter. We also significantly reduced our contract labor, and our internal team stepped up to fill in the gaps. We continue to effectively implement the cost containment programs that have been underway in Indonesia, and as a result of these combined initiatives, our unit cash cost declined from $1.90 per pound on a net unit cost basis in the first quarter to $1.47 per pound in the second quarter. This was over 10% better than our April forecast. We're continuing to manage all costs very carefully and expect our net unit cash costs to trend lower in the second half of the year and into 2021, as we increase volumes at a very low incremental cost. Our current forecast incorporates current market conditions for energy prices, currency rates, and other input costs. These input costs have increased somewhat from our April forecast, but this has been offset by improved gold prices. So, we're continuing to expect our net unit cash costs to be roughly $1.53 for the year, similar to the average cost we estimated of $1.55 in April. In 2021, the average is expected to decline to below $1.20 per pound. With rising volumes and declining cash costs, we expect our margins and cash flows to expand in the second half of the year. As you look at slide 20, this provides the EBITDA and cash flow sensitivities, and shows the significant cash flow generation we expect from the business, bringing in the additional volumes into 2021 and 2022 and beyond. As you'll see, assuming gold prices are flat at $1,800 per ounce, and molybdenum flat at $7 per pound, we would generate between $6 billion and $8 billion of annual EBITDA at copper prices ranging between $2.75 per pound and $3.25 per pound. Operating cash flows reflected at the bottom of the chart would range between $4 billion and $5 billion at these price levels. This provides a significant amount of cash flow to fund our capital expenditures and provides excess cash flows for further balance sheet improvement and returns to shareholders. We're all very focused on this, and we’re very close to getting there, as you'll see from the results we expect in the fourth quarter of this year. Much of the capital that was required to generate this result has already been spent to achieve this. We will continue to maintain our focus on delivering these results. On slide 21, we present the capital spending plans. We continue to manage the capital plans in line with the revised estimates we laid out in April. As a reminder, we reduced our 2020 capital spending by about $800 million, and we're tracking very well against those plans. The bulk of the $2 billion capital budget for 2020 is related to the Grasberg underground development, which will pay back quickly as we reach capacity rates. As Richard indicated, the spending for Lone Star in 2020 is largely behind us, and we'll begin to generate cash flow from that operation. We have adjusted the 2021 capital budget slightly down from $2.3 billion to $2.2 billion that was originally estimated at the beginning of the year to total $2.4 billion. And we're presenting our 2022 estimates. You'll see the spending at Grasberg will begin to decline after 2022 as well. We're going to continue to manage our capital spending levels very carefully. We remain very disciplined in carrying out our revised operating plans. Turning to our financial and liquidity position, you'll see we had strong liquidity at the end of June, totaling $5 billion, and our financial position is strong. We've taken steps to protect the balance sheet and liquidity, and we undertook a series of capital markets transactions over the last 12 months to extend out our debt maturity profile and provide flexibility. We also worked with our banks and achieved an amendment of our credit facility during the second quarter, which provides substantial flexibility and gives us access to liquidity under the bank credit facility. We show our net debt at the end of June of $8.4 billion; that's a debt of just under $10 billion, net of our cash position of $1.5 billion. That equates to about 2.5 times the estimated 2020 EBITDA. Notably, that relates, if you look at 2021 EBITDA, the leverage is 1.4 times. If we were to apply the 2021 projected excess cash flow to net debt reduction, we’d have $5.3 billion of net debt at the end of 2021, or less than one time the 2021 EBITDA. Our uses of excess cash will be considered by the Board. There's a strong commitment to maintaining a strong balance sheet to drive shareholder returns over the long term, and our Board will consider financial policy as we go forward. At the bottom of the chart, the average duration of our debt is currently just under 11 years. We've built substantial flexibility with the maturity schedule that is very attractive over the next few years. Regarding financial policy, as we've covered throughout this call, we remain focused on safeguarding our people and our business, and maintaining strong liquidity and balance sheet strength as we manage through uncertainty during the pandemic. As previously reported, our Board has indicated it does not expect to declare dividends in 2020, but this will be evaluated on a regular basis. As we successfully execute these plans in 2021, we expect to be in a much stronger position with increased cash flows and enhanced flexibility to consider shareholder returns. So that's just a summary of our quarter and outlook. Operator, we’d like to take questions.
Operator, Operator
Ladies and gentlemen, we will now begin the question-and-answer session. Our first question will come from David Gagliano with BMO Capital Markets.
David Gagliano, Analyst
You’ve covered a lot of it in the prepared remarks. But I did just want to try and talk a little bit more on the capital return policy. Obviously, strong free cash flow generation is expected over the next six quarters, and the net debt metrics flow to one times. Is there a target average leverage metric over the cycle? And from a timing perspective, when should investors start thinking about getting some of that cash back?
Richard Adkerson, CEO
So, Dave, we’ve always approached those questions not from the standpoint of developing any particular financial metrics, but assessing commodity markets, cash flows, and where we stand. We will want to reduce our debt from the current levels. We were on track to do that before COVID. As these cash flows recover, and Kathleen talks about capital spending going down, we will have much higher volumes, and the prospects for higher copper prices will provide opportunities in the relative near term. By the end of 2021, we can achieve that goal of reducing debt going forward. Now, I want to compliment Kathleen and her team for the actions they have been taking over the past 10 months or so. We've had three bond offerings now that have been very successful at rates that are really attractive considering that we are just beyond being investment grade; we still expect someday to get back to investment grade. But now, we've spread out our maturities, and we've worked with the flexibility of the bank group, so we can achieve all that. I can't give you anything other than, if this world unfolds like we hope it will, and expect it to in the very near future, we're going to be able to return paying dividends and looking at the possibility of buying back stock, depending on how the equity market reacts to our improved situation. I quite frankly expect the equity market to react positively in a significant way.
David Gagliano, Analyst
Okay. Thanks for that. And somewhat related on the Indonesian smelter, first of all, I'm assuming that the cash flow numbers are not included in anything for the smelter and the CapEx for smelters...
Kathleen Quirk, CFO
That's right.
David Gagliano, Analyst
Okay. And then, in the press release…
Richard Adkerson, CEO
But let me just say, I know you understand this, Dave, because you followed us so closely over the years. But, to be clear to everyone else, the smelter, if we go forward with the current plan, and as I said, that's under discussion, will be financed by PT-FI where we have a 49% equity interest. But because of our shareholders agreement with the government of Indonesia and the state-owned company, MIND ID, we consolidate. So, we have a 49% interest. We finance that entity, but it will show up as consolidated debt because we consolidate PT-FI, which is really good for the way we present our financial statements.
David Gagliano, Analyst
Okay. That's helpful. Then just really quickly, the related question there on the Indonesian smelter. The press release talks about other alternatives in terms of deferring schedule for the projects as well as other alternatives. Can you touch a little bit more on what those other alternatives might be?
Richard Adkerson, CEO
One of the positive things about this is these considerations within the Indonesian government are being led by the Minister and the Ministry of State Owned Enterprises. In the past, we had to deal with that on our own. We have aligned interests with the state-owned enterprises. A number of alternatives are being considered, which would be alternatives to building the smelter that is presently contemplated. It's a complicated political situation, it goes without saying. But the economic benefits to the government are really strong if we were to pursue other alternatives that would require significantly less capital from PT-FI.
David Gagliano, Analyst
Okay. That's helpful. Thanks very much.
Richard Adkerson, CEO
Thanks, Dave.
Operator, Operator
Your next question comes from a line of Carlos De Alba with Morgan Stanley.
Carlos De Alba, Analyst
Thank you very much. Good morning, everyone. My question is about the ramp-up in Indonesia's ground operations. Congratulations on achieving the targets and being on the right track to deliver results there. I have a question regarding slide 25. The open drawbells on a cumulative blasted basis have declined slightly from the last quarter's presentation, with a slight decrease in 2020, 2021, and 2022 in the DMLZ. For the GBC, it is lower in 2020 and 2021 but slightly higher in 2022. I realize this might be too specific, but since this is probably the most critical aspect for the people moving forward, I would like some clarification on what caused the rise in the forecast. Thank you.
Kathleen Quirk, CFO
Yes. This is Kathleen. There were just minor revisions to the Deep MLZ and GBC drawbells. You can see at the end of 2021, we had 213 for Deep MLZ and 322, and those have been reduced by 3 each. It has not been anything significant and just slight timing differences. By the end of 2022 in Deep MLZ we’re just slightly below, but it doesn't change the ore extraction levels, and it's pretty much the same plan that we've been on.
Carlos De Alba, Analyst
Understood. Thank you very much and good luck.
Richard Adkerson, CEO
I'll just say that this is a complicated operation; Mark Johnson is on the call and nobody knows that better than him. There will be ups and downs and adjustments along the way, which is part of our everyday experience. However, we are confident in what we set out to achieve and in our ongoing efforts. That said, we will encounter challenges as we have in the past, so expect to see adjustments of this nature occur occasionally.
Carlos De Alba, Analyst
All right. Understand, Richard. Thank you very much for the color.
Richard Adkerson, CEO
Okay.
Operator, Operator
Your next question will come from the line of Alex Hacking with Citi.
Alex Hacking, Analyst
Yes. Good morning. Thanks, Richard and Kathleen. I just wanted to ask about the production guidance. In the last quarter, in the teeth of the COVID crisis and copper prices extremely low, you cut your production guidance for this year and, in particular, next year where you took a couple of hundred million pounds out of South America. Is that something that gets revisited if copper prices are sustained at these levels, or are those kind of revised mine plans locked in?
Richard Adkerson, CEO
Well, they are revised mine plans that we're following. We are not making any major adjustments to those until we have clarity in this market situation. As clarity occurs, the plans will be adjusted; the resources are there since some of the cut production was a lower-margin production. If prices increase, it becomes profitable again. There will be timing impacts as to how it ramps up and so forth. So, it will be part of our future. But as you know all too well, this is not a turn on or turn off; it has impacts. To ramp it back up takes some time.
Operator, Operator
Our next question will come from the line of Chris LaFemina with Jefferies.
Chris LaFemina, Analyst
Hey. Good morning, Richard, Kathleen. Thank you for taking my question. For me, the most impressive data point in this earnings release was the unit cost performance in the Americas, especially on a site production and delivery cost basis where you had very substantial reductions from the first quarter to the second quarter. I suppose that's a function of the changes to your operating plans. My question relates to the guidance. So, if you look at the unit cost guidance for 2020, particularly in South America, it implies that site production and delivery costs will rise in the second half of the year. I'm wondering why that might be. I suppose, related to that is Cerro Verde production. I think in the last quarter, you had guided to a second half 2020 mill rate of 400,000 tons per day. In the presentation today, you’re guiding to 350,000 tons per day. I'm wondering if there is some kind of cost increase that we should expect for Cerro Verde in the second half of the year. I would have thought that with the mill rate going up from the run rate in the second quarter to the second half of the year, unit costs might actually fall further, but it does not appear to be the case. So, just if you can give us some clarity as to what exactly is going on with the cost outlook for the second half of the year in South America in particular.
Kathleen Quirk, CFO
The main change in the second half compared to the second quarter in South America relates to increasing the Cerro Verde mining rate. During the second quarter, the mining rate was lower than what we expect, and in order to get the mill rate up on a sustained basis, we'll have to begin increasing the mining rate. That reflects in the second half. But to your point about the cost reductions, the team has done incredible work in bringing down costs. I mentioned the use of reduction in contract costs, and we’ve had some headwinds on some of the currency exchange rates and energy costs from the low levels that we had in the second quarter. Those have reversed a little bit. But the discipline of driving the cost performance and balancing that with production is something our team is very focused on. So, that's to the prior question, about increasing copper volumes; we're being very careful to ensure that we maintain sustainable cost savings and the cost structure before starting to ramp up. But specifically on South America, the increase relates to an increase in the mining rate at Cerro Verde from the second quarter levels.
Chris LaFemina, Analyst
Okay. Thanks for that. And I have one other question related...
Richard Adkerson, CEO
Yes. Let me come in here because I really appreciate the comments you made about the performance in the Americas. And this goes back to the rationale when we put Phelps Dodge and Freeport together. The Americas operations are characterized by these very large, lower-grade ore deposits, which is kind of the world forward in the copper industry. Red Conger and Josh Olmsted had such experience with this, but they're doing a great job. The operations in the field and the way they're managing the team, we operate all the mines that we have interest in. So, we're able to achieve synergies across the board. Our global supply chain group has done just a great job in working with our suppliers and coming in with cost. We've had a playbook for this. I mean, we've done this before, and we're doing it again very effectively. But these teams really need to be recognized for dealing with this entirely different set of management challenges than you have with this high-grade mine we have in Grasberg. I want to also recognize Kathleen and Steve Higgins, our Chief Administration Officer for what we've done with G&A. This is really significant. Our Company changed dramatically at the end of 2016 when we exited the oil and gas business, and restructured our management team. But at that year, we had only $700 million in G&A. Now, our current expectations are that we go down to $355 million. It’s been in steps over these years, but that's almost a 50% reduction in G&A over the past four years. This has been done as a process. We made some major steps; we had to furlough some people, unfortunately. We had an incentivized early retirement and severance plan. We’ve reduced our head count in our centralized groups by something over 30%. But this is all part of the things that have come out from this COVID initiative and they will all have long-lasting benefits. As a company, we’ll never work in the same way that we did before this COVID thing changed. There will be less office space, less meetings, and less travel. We proved to ourselves that we can work effectively. We did not go back to work in Phoenix when the Governor opened the state up. The halls and offices are empty in our headquarters. Yet, you can see the results from this quarter, showing us how effectively we can operate in this kind of environment. We're learning lessons from that that we will carry forward into how we conduct business in the future.
Chris LaFemina, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Jatinder Goel with Exane BNP Paribas.
Jatinder Goel, Analyst
Good morning. Just a quick question. Thinking more long-term. Richard, you alluded that when market conditions allow, you can look at Lone Star expansion. You also indicated about a 5-million-ton gap emerging in the market by 2030. To me, the real constraints for you appear to be the balance sheet and potentially management capacity till Grasberg is delivered. From a long-term perspective, you've got three things probably on your plate, Lone Star, El Abra, and Kucing Liar, which you can look at after Grasberg is delivered, and balance sheet is at a more normal capacity. How quickly can you move to develop either or all of those projects, and what could be the order of priority? So, just trying to get some sense of your earliest possible timeline and order of priority.
Richard Adkerson, CEO
The timelines are long. One of the issues that are supportive of copper supply is simply how long it takes from identifying a resource to doing feasibility studies for how it's to be developed, how to be permitted in processing and so forth? All of these things will take a long time. That is a key reason why the outlook for copper as a commodity is so strong. The current projects that are being pursued today are not significant to the market in aggregate but are significant to companies, and they are being delayed. So you ask about our situation. Kucing Liar fits into our long-term mine plan for Grasberg, and that's something we're assessing and will consider going forward. Lone Star has the opportunity for oxide expansion, which is growing. That could be done with a limited amount of investment in new facilities. But longer term, there’s a large sulphide resource, and this will be long-term; it is very, very large. That would require a very large concentrator expansion. We have great opportunities at El Abra with our partner Codelco in Chile. We have great opportunities in the U.S. at other properties, including Bagdad, Morenci, Sierrita, and our properties in New Mexico. All of these things are currently being studied. We are going to be very disciplined about it. Our first step for cash flow will be using debt to increase shareholder returns, and then we will restrain spending in the project evaluation area as we have across the board for the current time. As the situation improves, we will return to investing in the evaluation process. In from that, we will come to timing schedules that you have. We don't have one right now. We will keep you informed as this unfolds and we start spending again, and get in the process for evaluation. But the key, positive feature about Freeport is this opportunity to grow our business internally to develop resources, which we get no value for currently in our stock price. If we develop those ourselves, all that value goes to our shareholders as opposed to making an acquisition where substantial value goes to the owners of the asset being acquired. I know that's not a clear answer to your question, but it's a truthful answer to where we are.
Jatinder Goel, Analyst
That's very helpful. Thank you so much for the clarification.
Operator, Operator
Your next question will come from the line of Lucas Pipes with B. Riley FBR.
Lucas Pipes, Analyst
Hey. Good morning, everyone, and congrats on another very strong quarter. Richard, in light of current gold prices, I wondered if you have considered changing your focus to foremost in copper, second in gold, or something along those lines?
Richard Adkerson, CEO
Lucas, gold, like copper, has its ups and downs, and often gold is up when copper is down, and copper is up when gold is down. I remember years ago when gold was really high, I decided to change the name to Freeport Gold and Copper.
Lucas Pipes, Analyst
And you already touched on my question, that is gold equities tend to trade at substantially lower discount rates. I wondered how you're thinking about that types that changing names or changing slogans. Thank you very much, Richard.
Richard Adkerson, CEO
We have over the years looked at a number of strategic alternatives involving our gold asset. Back in the days before Phelps Dodge, Freeport was a company that was two-thirds copper, one-third gold. We struggled to attract investors because of the different objectives of gold investors and copper investors. We found the only way we could attract investors was by paying extraordinarily high dividends. For those of you who are too young to remember, that was where we were. We made the commitment to the copper business. The gold component of Grasberg is, as I talked about earlier, a key reason why that asset is so incredibly attractive. We are price takers with gold. We continually review options about dealing with it. But, today we concluded that its greatest value is to us is in funding the cost of Grasberg. Just think about this: having 1.5 billion pounds of copper with no cost or negative cost. So, that's the role we see it playing in our Company.
Operator, Operator
Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research.
John Tumazos, Analyst
Thank you very much. Congratulations on the great production, and thank you for the update on the next smelter. Some of the other companies have cut back on exploration, waste stripping, underground development, or maintenance, and struggle to keep up production. Are there any of those functions that have been delayed at some of your sites such that 2022, 2023, 2024 output targets might be a little uphill or tougher to meet?
Richard Adkerson, CEO
Kathleen, let me start. So, John, that is a great point. You could look back in our history; in 2008, when the price of copper just cratered from $4 a pound at mid-year to nearing $2 a pound by mid-to-late 2008, we did have to make some of those changes. I mean, we parked a hundred trucks at Morenci, right Red? It was something on that order. We had to cut production in half. That resulted in a multiyear ramp-up. So breaking our business apart from exploration, we have essentially terminated all greenfield exploration, which is pretty limited for us considering our brownfield opportunities. We continue to do work at key operations. That’s not going to be a constraint for us going forward. Grasberg, we really have looked at costs hard, made some reductions, but done nothing to slow down the ramp-up of our future. So, we did defer a mill improvement but could have some impact, but it was only short term. Now with prices being where they are, that's not going to be an issue. With the Americas, as I said, we've been very wise. We’re doing this in a way that preserves as much future production as we can. But as Kathleen illustrated with Cerro Verde, when you cut back the mill and the mine rates, there is a timing issue in getting the mine rates back up to rates that feed the mill. There will be some impact, but we are so mindful of that, and I believe we’ve been effective in minimizing that impact. In any event, we’re going to update this every quarter, and so we give a lot of details. You’ll be able to see that as we go forward.
Kathleen Quirk, CFO
Yes. I was just going to say, the mining rate reduction we took in the U.S. was deliberate in terms of getting the cost structure as low as possible. The metal production rates that we show in our forecast are consistent with the level of mining rates we are deliberately working toward. It’s not like a situation where we have an uptick at the metal forecast to coincide with the mining rates. So, our mining rate and metal forecasts are aligned. In the second quarter, we did have similar mining rates for Cerro Verde because of the pandemic. That was the only case where we mined less and kept the mill as full as possible, and we'll have to ramp up mining in the second half. However, the rest of the mining operations in the U.S. have been cut back deliberately, and we’ve reflected that in our metal forecast. If we were to ramp back up, which our current plans assume will start ramping back mining rates in the 2022 timeframe, you will see improvement in that metal over time. We haven't shortcut anything, and so all of our mining rates in metal forecasts are in line.
John Tumazos, Analyst
If I could ask one more, and thank you for the two replies. You have the footnote on the Lone Star slide that the potential mineralization is over 50 billion pounds. I guess that would be at least 3 billion tons of mineralized material. In your gut, do you think that the Lone Star is more like 3 billion tons or 5 or 10 or even bigger?
Richard Adkerson, CEO
Hey, Red? Red, you're on the call, right?
Red Conger, CRO
Yes. John, it’s a huge district. We're very excited about it as we've reported in the past, with lots of drilling to be conducted. We think we're going to find that the full district has mineralization in it, and if you look at the maps, Lone Star is miles away from those progresses where we first started mining. So, there are lots of drilling yet to do, but the Lone Star deposit is, as a mineralized material, just as you cited. We’ll continue to drill and explore there, and we will update those as we get more information.
Kathleen Quirk, CFO
Yes, John, the oxide project we are working on, along with the potential expansion of oxides, is not only financially viable in terms of initial investments but also enhances the economic feasibility of the sulfide ores. While this is a long-term opportunity, mining the oxide will make it more economically attractive. We are very enthusiastic about the district and believe it will play a significant role in Freeport’s future.
John Tumazos, Analyst
Thank you.
Operator, Operator
Your next question will come from the line of Chris Terry with Deutsche Bank.
Chris Terry, Analyst
Hi, Richard and Kathleen. I hope you’re both well. Just a quick one for me, and that is the 2021-2022 volumes were just down a touch versus the last quarter, just comparing the two presentations. So, I think it's 100 million pounds or so. Is that just a bring-forward effect where you've done better in 2020, or is there something else to that? It’s very minor, but sort of check?
Kathleen Quirk, CFO
The main difference lies in the mining and milling activity in South America. We initially projected a lower rate at Cerro Verde, moving from 400 to what's currently outlined in our plans. We also made some slight adjustments to El Abra. While these were minor changes, they did have an effect on the years 2021 and 2022. Grasberg remains unchanged.
Chris Terry, Analyst
Okay, thanks. Actually, one follow-up just to complete one of the questions from a bit early just on the cost side. I mean you commented on sort of some of the ups and downs. You had the tailwind from, I think, in Indonesia on the currency last quarter and then oil down drastically. And then, there's ups and downs on mining rights. But from a macro sense, just given that we've now seen copper start to rebound, are we entering an environment where you start to see inflation in general on some of the costs for the business as well, just more from the macro variables?
Kathleen Quirk, CFO
The main thing we've observed is related to currency rates. Energy prices have increased about 18% compared to our forecasts from April. However, some of this has been offset by gold. The strength of the dollar against certain currencies has affected our costs in Indonesia due to the rupiah and also slightly in Chile and Peru. That's primarily the only issue we've encountered—these macro currency exchange rates and energy prices. We have not seen inflation in other areas and are continuing to work with our suppliers. Additionally, given the employment levels, labor rate pressure isn't as significant as it can be during times of rising copper prices. We plan to keep focusing on reducing costs as much as possible, using this time to implement our revised plans and drive costs down. In both the U.S. and South America, costs significantly impact value—the lower the costs, the greater the resource. Therefore, we will concentrate on this throughout 2020.
Chris Terry, Analyst
Great, thanks. Thanks, Kathleen, and congrats on a great turnaround in the quarter.
Richard Adkerson, CEO
Thanks a lot.
Operator, Operator
Your next question will come from the line of Brian MacArthur with Raymond James.
Brian MacArthur, Analyst
Just two quick questions. First of all, I just want to confirm, the forecast through 2022 and all your production, your cash flows, is Chino in there or is it not?
Kathleen Quirk, CFO
It is not. It's currently remained idle, and we're still evaluating next steps with respect to restart.
Brian MacArthur, Analyst
Perfect. Thank you. My second question, and I know maybe getting a little ahead of myself here, but obviously you're going to generate an awful lot of cash flow going forward. As Richard said, you’ve been working for 15 years to get everything underground and set up the Grasberg, which has had a lot of work. You've sort of had ongoing major project costs of $1 billion a year; and you get down to $900 million in 2022. I understand too that in 2022, the ownership changes a little bit. But what does the ongoing capital look like sort of post-2022, once we get the GBC developed, everything's up and running? How long can you do it? I mean, just keep generating without major capital going into KL or something? Because I would think post that period, you've had substantial capital to build this thing for 15 years. Some of that on a runway should come off or is that right?
Kathleen Quirk, CFO
Yes. Regarding our current plans, we expect capital to decrease in 2022 compared to 2021, and this decline will continue into 2023. We are assessing the KL project, running various scenarios and trade-off analyses to examine the capital needed for its development, including the potential addition of processing equipment for pyrite ores. We are exploring whether there is a more valuable option with a lower capital requirement that focuses on mining areas with less pyrite. This approach may provide greater value than pursuing full development of the entire resource. We are actively working on these analyses. However, looking ahead, as we ramp up Grasberg, we anticipate that capital expenditures will further decline.
Brian MacArthur, Analyst
Kathleen, you did say to 3 to $400 million, right?
Kathleen Quirk, CFO
Right. It'll go down to $3 million to $400 million, right, from over $1 billion.
Brian MacArthur, Analyst
Yes. Right. Great. Thank you very much. Again, congratulations on the great progress that has been made.
Operator, Operator
Our final question will come from the line of Michael Dudas with VRP.
Michael Dudas, Analyst
Thanks Richard and Kathleen. What a difference a quarter makes, huh?
Kathleen Quirk, CFO
We were just saying the same thing.
Michael Dudas, Analyst
My question is, Richard, do you think how your company and the industry has evolved and managed through COVID in the past four months and what will happen in the future? Do you think that the industry or maybe Freeport, particularly and the industry in general will be perceived as a better partner from a labor and a government standpoint? So as we move forward in the next several years of higher prices and development and maybe some issues with regard to royalties and such, do you think that what’s come out that will be helpful to the industry and that could also maybe be helpful on ESG or any type of thing? Thank you.
Richard Adkerson, CEO
Yes, I do. In fact, early this morning I added to my notes that I was going to say that I said earlier actually when we're done with COVID, in many respects, it has brought us closer to communities and governments. I recall going into February, going into March, when we started working remotely Kathleen and I were looking at each other and saying, okay, now what are we going to do? By April, we had a plan. Well, that's the situation for all these communities and all these governments, and people are still struggling with that. By our being aggressive in investing in healthcare protocols, testing equipment and doing things to help these communities in Indonesia, we have two PCR labs. Here in the United States, what does it take oftentimes? It’s a week to two weeks to get PCR results. Well, we have two PCR labs, one in Lone, and one to the Highlands which we’re working with the community use, and that's much appreciated. We have to build an oxygen facility in Arequipa. By showing that we are competent in managing these situations, by showing we have sensitivities to workers’ families and the communities by working with governments to do that, we're showing competencies, sensitivity, and the fact that we are committed to being good partners. I think all of that is going to be beneficial. We've achieved that in steps. We moved our headquarters to Arizona several years ago. We made a big commitment to show the people of Arizona that we could be good partners. Now, we are broadly regarded as being great partners. So, that is an excellent point. ESG matters are growing in importance and significance to investors. We know that. We believe that's a good trend. We will measure up well by that, because that's just what our commitment is.
Michael Dudas, Analyst
It’s quite encouraging. Thank you, Richard.
Richard Adkerson, CEO
Thank you all for…
Operator, Operator
Now, I’ll turn the call over to management.
Richard Adkerson, CEO
Thank you, Gina. Thanks to everyone joining us. We appreciate your interest and the excellent questions. A quarter has really made a significant difference, and it’s wonderful to now focus entirely on our business operations. We look forward to sharing ongoing progress. As always, if you have any questions or need additional information, please reach out to David Joint, and we’ll respond promptly. Best wishes to everyone. Stay safe and look after your families and friends.
Operator, Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.