Earnings Call Transcript - FCX Q4 2021

Operator, Operator

Thank you for being here today. Welcome to the Freeport-McMoRan Fourth Quarter Conference Call. Currently, all participants will be in listen-only mode. We will have a question-and-answer session later. I now want to hand the call over to Ms. Kathleen Quirk, President and Chief Financial Officer. Please proceed.

Kathleen Quirk, President and CFO

Thank you and good morning. Welcome to the Freeport McMoran conference call. Earlier this morning we reported our fourth quarter and year-end 2021 operating and financial results and a copy of today's press release and slides are available on our website at FCX.com. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today. Before we begin today's comments, we'd like to remind everyone that our press release and certain of our comments on today's 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 SEC filings. On the call with me today are Richard Adkerson, our Chairman of the Board and Chief Executive Officer; Mark Johnson, who heads up our Indonesian Operations; Josh Olmsted, who heads up our Americas Business; Mike Kendrick, who leads our Molybdenum business; we also have Rick Coleman and Cory Stevens, who support our team with engineering and construction, technical services and support for our growth projects; and Steve Higgins, our Chief Administrative Officer. I'll start by briefly summarizing our financial results, and then I'll turn over the call to Richard who's going to review the slide materials in our presentation. Today, FCX reported fourth quarter 2021 net income attributable to common stock of $1.1 billion or $0.74 per share, and adjusted net income after excluding net charges totaling $0.3 billion or $0.21 per share was $1.4 billion or $0.96 per share for the quarter. For the year ended 2021, our net income attributable to common stock totaled $4.3 billion, $2.90 per share, and adjusted net income totaled $4.6 billion or $3.13 per share. Our adjusted earnings before interest taxes and depreciation for the fourth quarter totaled $3.2 billion and for the year totaled $10.9 billion. We've got a reconciliation of our EBITDA calculations on Page 43 of our presentation materials. Our team delivered great volume growth during the year, our copper sales of over a billion pounds during the fourth quarter approximated our guidance going into the period. And for the year we sold 3.8 billion pounds of copper, which was a 19% increase from 2020. Our fourth quarter 2021 gold sales of 395,000 ounces were about 5% above our guidance going into the quarter, reflecting higher throughput rates in Indonesia. Our annual gold sales totaled 1.4 million ounces for the year and were 59% above the 2020 total. The quarter benefited from positive pricing for copper. Our average realized price of $4.42 per pound in the fourth quarter was more than $1 per pound higher than the fourth quarter of 2020. Our realized gold price of $1,808 per ounce was slightly below the year-ago quarter. Additionally, we benefited from improved molybdenum prices, with a realization in the fourth quarter of 2021 of over $19 per pound, which was almost double the year-ago periods realization. Unit net cash costs during the fourth quarter averaged $1.29 per pound of copper. That was slightly above our estimate of $1.26 going into the quarter, but that reflected a non-recurring charge associated with the successful completion of our multi-year collective labor agreements at Cerro Verde in Peru. We generated strong cash flow during the quarter, with $2.3 billion of operating cash flows, and for the year, we generated $7.7 billion of operating cash flow, which exceeded our capital spending of $2.1 billion for the year. In November 2021, our board approved a new share purchase program, authorizing purchases of up to $3 billion of FCX common stock. Through January 25, we acquired 15.4 million shares at a total cost of $600 million and that was at an average price of $39 per share. Additionally, the board approved in November, an increase in common stock dividends for 2022, effectively doubling our common stock dividend. On December 22, we declared dividends totaling $0.15 per share that will be paid on February 1 of this year to shareholders of record as of January 14. Our balance sheet is strong. You'll see that in the results. The net debt at the end of the year totaled $1.4 billion. We had no borrowings under our $3.5 billion revolver. We have strong liquidity with $8 billion of cash at the end of 2021. I'd now like to turn the call over to Richard who'll be referring to our presentation materials on our website.

Richard Adkerson, Chairman and CEO

Thanks, Kathleen. And hello everyone. The end of 2021 is a special time for our Freeport team. We've met a series of multi-year complex challenges with great success. You start by looking at the debt picture, which Kathleen mentioned; just six years ago, our debt was $20 billion, and the way to manage it was really unclear. We have now reached the point where our debt is minimal. We have started a program of shareholder returns with higher dividends and share buybacks. We have assets in our outlook that will allow us to increase those over time. Our credit rating has been raised to investment grades by two of the agencies. Then you look at the Grasberg underground project, which goes back much further. We began our initial plans for this underground operation in the mid-1990s. We began spending capital 20 years ago. By the end of the year, we met our target by reaching our metal long-term run rate. We are taking steps successfully and have the way forward to increase our mining rate to well over 200,000 tonnes per day from the underground; that's just remarkable. During this period of ramping up Grasberg, we had challenges in our dealings with the Indonesian government about our contract of work. We resolved those three years ago. I'm pleased to report that our relationship with the government of Indonesia is now cooperative, working together mutually for common goals. Relationships have never been better. Two years ago, we started facing COVID. That was a huge uncertainty for us. At the time, we took aggressive steps to be prepared to manage the risks that were emerging. We successfully managed our way through that and achieved our debt reduction at Grasberg underground from that standpoint. ESG is on everybody's mind these days. It's always been part of our psyche at Freeport, because of the nature of operations. We’ve begun aggressive efforts to deal with climate change impacts from our operations. We're working with the copper industry with this copper mark designation, which we have been a leader in and working with ICMM with communities. I became Chairman about a year ago, and I made commitments to myself to strengthen Freeport's board. This year, we've added six new directors, all well-known highly regarded CEOs with extensive international business experience who add a lot to our board. We also added two women, both of whom are financial experts with experience in audit committee dealings. One is proudly Hispanic. It's just been great work by our team, and we have a real sense of accomplishment. We are really looking forward now to the future with optimism, commitment, and excitement. Turning to our results, our copper volumes grew by 19% compared with the prior year, reflecting this ramp-up in Indonesia. Our unit costs declined despite rising energy costs and other input costs. Our team did a great job of managing the challenges of supply chain and cost inflation. We generated strong margins. Our EBITDA and cash flow rose by 2.5 times over 2020. We ended the year with just over $1 billion in net debt. We are well prepared with our long-life reserve and resource base to advance organic growth over time. With the ramp-up at Grasberg reaching the point that it is, we’re now looking to our operations in the Americas for future growth. It's nice to talk about accomplishments, but we're all focused on what we go from here, how we build more value for our company, and we have a great opportunity to do that. Over 20 years ago, our company made a commitment to copper that was driven by supply-side constraints that we saw in the global marketplace at that time, particularly growth in China. We have fundamentally stuck with that. Our board made a diversion with this oil and gas deal, but that's behind us now. The fundamental outlook for copper, as positive as it was 20 years ago, is now even more robust, driven by copper's role in the global economy and the overwhelming need for copper as the world develops. China remains important; global growth will occur outside China, but the new elements of demand are significant. Any investments in carbon reduction require significantly more copper than the world has previously needed. Electrification is the key to climate change. Two-thirds to three-quarters of copper’s use is associated with electrification, whether it's electric vehicles, alternative energy generation—all require much more copper than traditional power. Additionally, technological advances in communication and artificial intelligence, development of infrastructure, and public health initiatives are all creating what I call a new era of copper demand. These are broad-based and inevitable. Copper will be affected by risks to the global economy from time to time, but underlying that is a long-term, very positive outlook for copper, and our company is solidly positioned to benefit from that. When we combine the supply scarcity with these demand factors, we have a compelling case for investing in our company. We see increasing scarcity in supply at a time when demand is growing significantly. There are a limited number of projects that have been under development for some time now, which are scheduled to come on stream in the near term. But when you look beyond that, it's hard to find actionable projects that can be developed within a very short period of time. It takes a long time. There is also increasing political risk around the world that will impact copper supply development. Notably in Chile and Peru—where 40% of the world’s copper comes from—there are new presidents who run on agendas oriented towards social programs that require more revenues. How the industry and governments deal with that will be very important. Additionally, countries are demanding more from miners in terms of revenues, which goes beyond Chile and Peru, ranging all the way from Asia to Central America to Africa. All of these factors contribute to supply constraints at a time when the world needs more copper. We're focused on the long-term outlook for our markets. We always prepare ourselves and recognize that near-term risks may emerge relative to the global economy. We are strong financially to manage these risks. We structured our business to provide flexibility, which gives us significant comfort about how our company is positioned to take advantage of what we believe will be a very positive outlook for copper as a commodity. Our report on reserves this year, which is based on mine plans of $2.50 copper, reflects we don’t limit ourselves to looking at projects solely on that basis. We have an optimistic view on copper that goes beyond $2.50, resulting in more than a 25-year reserve life confirmed in probable reserves. Additionally, we have enormous amounts of incremental mineral resources that will be brought into reserves over time through ongoing drilling and engineering work. This is a key asset for Freeport, providing us many options for the future. Considering accessibility to the industry for development opportunities, we do not need to rely on acquisitions to support our long-term future. While we monitor opportunities, we have ample assets within our company to sustain significant growth over time. With these favorable markets, our margins and cash flows are growing. We have well-established plans, and our whole team globally is focused on executing plans to produce more copper at a lower cost. We built a strong foundation for the future. We had significant sales growth in 2021, considering this in our near-term strategies. We're projecting a 13% increase in 2022, while being prepared to navigate risk and expecting growth margins that will ultimately generate cash to support returns to shareholders as we invest in future growth. Looking at the successful ramp-up of Grasberg underground, I wish all of you could see it, because I have a big smile on my face. It is significant what we've accomplished there. Our team deserves tremendous credit for overcoming monumental tasks. We have over 350 miles of tunnels and seven miles of an underground railroad with electric trains running to huge crushers, five miles of conveyor belts, and numerous shafts to transport individuals below ground. All this work has positioned us to achieve long-term sustainable rates of over 200,000 tonnes a day from our mines through our mills. This creates a robust foundation for the future. Grasberg has become the second-largest copper mine in the world and the largest single gold mine, even though it's a byproduct. In the fourth quarter, our net cash costs remained impressively low at only $0.08 per pound for the second-largest copper mine in the world. We achieved a long-term run rate of 1.6 billion pounds of copper a year, over 750,000 tonnes. All this sounds simple on paper, but the reality is it was not easy to accomplish, and our team should be recognized for their remarkable efforts. As we look ahead, we seek to grow our business. New technologies we’re developing in the Americas signify a huge opportunity for Freeport. Our company has historically been a leader in developing leaching technologies. Our Morenci Mine in Arizona is the largest leaching operation in today's global copper market. The new technologies are enabling us to improve recoveries and yield copper that we previously thought was beyond our reach, which is a game changer for us. At our mine in Northwestern Arizona, the Bagdad mine has a long reserve life, making it ideal for mill expansions to achieve greater volumes in a relatively straightforward manner. In Eastern Arizona, we have the Lone Star mine, which I believe will soon become our All-Star Mine. We are expanding recoveries of the oxide ore there, taking advantage of nearby facilities. The Safford mine, where production is declining, sits above the sulfide resource at the Lone Star mine. We're also waiting to see how things unfold at our project in Chile, as well as with the Kucing Liar mine, which is undeveloped at Grasberg and is projected to become one of the largest Block Cave mines, with a resource of six billion pounds of copper and five million ounces of gold by 2041. We're coordinating with the government now regarding rights beyond 2041, and that mine will be producing well before that date. Ultimately, we aim to achieve a mill rate of up to 240,000 tonnes a day from Grasberg's operations. I hope all of you are able to see our supporting slide regarding the Lone Star mine operations, displaying our data on increasing efficiency. Our oxide developments will be profitable at attractive costs. However, the real long-term potential lies with the sulfide resources beneath the oxide deposits. This will take time to develop. But we expect it to become something akin to what we have at the Morenci mine, which is the largest mine in North America. The unique technology we're pursuing is something you'll hear much more about from us across our industry. We are working on multiple exciting new types of technologies, and we believe we may have nearly 40 billion pounds of copper in those existing waste stocks. Even small recoveries from that could result in copper production equivalent to developing a whole new mine. This is in the early stages of research, where there is extensive work ahead, but we are very excited about these prospects. I want to close by recognizing our team around the world. I am incredibly proud to be part of this team. We have a group of talented individuals who not only are technically adept but also highly motivated and work together cooperatively. They are devoted to making Freeport the leading copper company in the world and keeping it there. We possess the skills to meet and exceed our expectations, presenting exceptional opportunities for our business. Regardless of outside opinions, it's important for you to know that I plan on being part of this team for as long as I'm able. I am enjoying my time more than ever, and I am genuinely excited to be part of this team as we move forward. Kathleen, I will turn it back to you.

Kathleen Quirk, President and CFO

All right, thank you, Richard. I'll start on Slide 17 and make some comments on our operating and financial matters, and then we can turn it over to your questions. We're providing some additional details on our fourth quarter operating activities on Slide 17. Richard mentioned the Lone Star mine, which he has renamed the All-Star Mine, continues to perform above the design capacity—we commissioned the mine in the second half of 2020—and last year we produced 265 million pounds of copper. That was a 30% increase from the original design of 200 million pounds per year. We've incorporated further incremental expansion into our plans that will take us up to 300 million pounds per year by 2023, with an investment of approximately $250 million. Accelerating the mining of the oxide ores exposes us to a larger sulfide opportunity. At Morenci, we're gaining momentum on our leach initiatives with substantial material already placed on leach stockpiles, which provides an opportunity to increase copper production at a low incremental cost, notably with a low carbon footprint. We're applying new technologies and using data analytics and sensors to measure our success. We are encouraged by some early wins and optimistic that there is much more to come. Initiating efforts at Morenci has allowed the team to share their findings across the portfolio, which presents a significant value opportunity for Freeport. We hope to report ongoing progress as we progress through the year. Our team also continues to ramp up mining and milling rates at Morenci, estimating production will be about 10% higher in 2022 compared to 2021. In South America, our teams are performing exceptionally well, restoring production to pre-pandemic levels. The 2021 sales from South America were about 8% higher than 2020, and we're projecting further increase in 2022. We continue to target full restoration of Cerro Verde's mill operations this year, and we're on track to return to a billion pounds per annum from this large-scale operation. Our Cerro Verde team continues to excel in managing the pandemic and achieved a terrific fourth quarter. We were also successful in finalizing our multi-year labor agreements at Cerro Verde during 2021. Regarding El Abra in Chile, we're making steady progress, increasing stacking rates of material on our leach pads and advancing the construction of a new leach pad to accommodate higher rates. We expect a 30% increase in 2022 production at El Abra from a relatively low base, planning to maintain a level of 200 million to 250 million pounds per year for the next several years while assessing future growth opportunities. As Richard mentioned, the real highlight for the year at Grasberg was reaching our targeted net metal run rate in the fourth quarter. This was a significant milestone, and we're all proud of it. We aim to sustain this level production during 2022, with opportunities to enhance our mill throughput rates in the latter half of the year when our new SAG circuit is completed. Our team at Grasberg remains energized, working to advance the Kucing Liar project and several other projects within the portfolio. Our next slide, Slide 18, provides an update on our progress to develop new smelting capacity in Indonesia aimed at fulfilling our commitments to the government. The site for the new smelter is taking shape, as illustrated in the photo on the slide. We completed piling and began pouring concrete for the flash furnace in the fourth quarter. Furthermore, we formalized agreements enabling the expansion of our existing smelter at P.T. Smelting with our Japanese partner in the fourth quarter. We are dedicated to executing these projects efficiently and timely. We’re funding the smelter's expenses through a $1 billion bank credit facility that PT-FI secured, and we're planning additional debt financing at PT-FI, obtainable at attractive rates to realize project completion. The long-term cost of smelter financing will be offset by the phase-out of the 5% export duty, so the overall economic impact is minimal. In Slide 19, we present a three-year outlook for volumes. We're pleased to report that our execution is on track, despite minor adjustments in our prior Copper Sales guidance for 2022 and 2023, and we've now included our current outlook for 2024. After delivering a 19% increase in copper in 2021, we are projecting a 13% increase in 2022, which incorporates higher production across the portfolio. For 2022 copper sales, we estimate around 36% will come from the U.S., 27% from South America, and 37% from Grasberg. Slide 20 shows a quarterly breakdown of our expected volumes. As stated, we anticipate lower grades in the first half across various sites in the Americas, which will gradually improve throughout the year. Our gold sales are expected to stabilize at approximately 400,000 ounces per quarter in 2022. On Slide 21, we compare our net unit cash costs for 2021 and project those forward into 2022. As you can see, costs are relatively similar between the years. Our global team has long focused on cost management and efficiency projects to extend equipment lifespans, enhance energy efficiency, maintenance practices, and leverage technology. This strategy has proven effective in the current environment, supported by our robust global supply chain team that collaborates closely with site operations management and long-term suppliers to meet our business needs. Our estimated consolidated year-end cash costs for 2022 are anticipated to closely mirror those of 2021. We anticipate increases in input costs, including energy, sulfuric acid, labor, and outside services, compared to 2021, but these are mainly offset by higher volumes. We will maintain our focus on cost management and provide operators with technology-driven solutions to address current cost pressures and inflationary challenges. Richard highlighted the strong cash flow we're generating, and we expect that to persist. Slide 22 illustrates the significance of our cash flow using volume, cost estimates, and prices fluctuating between $4 and $5 copper, while stabilizing gold at $1,800 per ounce and molybdenum at $19 per pound. The modeled results indicate annual EBITDA from $12 billion at $4 copper to over $16 billion at $5 copper, with annual operating cash flows ranging from nearly $9 billion to $12 billion, demonstrating our ability to generate robust free cash flow consistently. Moving onto Slide 23, we provide our capital outlook. In 2021, our capital expenditures, excluding smelter costs, totaled $1.9 billion, slightly below our guidance of $2 billion. We're projecting capital expenditures of $3.3 billion in 2022 and $2.7 billion in 2023. The primary variance from prior guidance for 2022 reflects the inclusion of the incremental Lone Star expansion and our plans to advance the Circular project at Atlantic Copper. You may have noticed a significant reduction in spending on the Grasberg Block Cave and Deep MLZ beginning in 2023. Additionally, the discretionary projects we've undertaken aim to improve profitability and value going forward, accounting for about 20% of our capital over the next two years. These value-enhancing projects are detailed further on Slide 24, summarizing discretionary capital additions to our plans, supported by the achievement of our net debt targets last year and the initiation of our shareholder return policy. We generate substantial free cash flow, buoyed by growing volumes, positive market conditions, and low capital requirements. Slide 25 highlights our accomplishments over the past several years; specifically in 2021, we reduced our net debt by nearly $5 billion while continuing to see growth in our EBITDA. We're in a fantastic position to execute our strategy, maintain a strong balance sheet, and return substantial cash to shareholders. Our financial policy is summarized on Slide 26, centered around a robust balance sheet complemented by a performance-based payout policy that allows for up to 50% of free cash flow to support shareholder returns, while the remainder goes towards growth and balance sheet improvement. On Slide 27, we commenced implementing this policy following our board's actions in November last year. We purchased nearly $500 million in stock in the fourth quarter, and through January to date, total cumulative purchases reach $600 million. We are progressing toward our goal of utilizing $3 billion in authorization. Our Board also approved a variable dividend for 2022, effectively doubling our common stock dividend. The combination of the share buybacks and dividends serves to allocate 50% of our cash flow while keeping a solid balance sheet and enabling flexibility for long-term investments. In summary, I'd like to reiterate what Richard said; we're well positioned for success in 2022 and beyond. Our team is driven by execution, we have momentum, and we look forward to building on our successes. Operator, I would now like to turn the call back to you to start the Q&A session.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Emily Chieng from Goldman Sachs. Your line is now open.

Emily Chieng, Analyst

Good morning, Kathleen, and thank you for the update this morning. My question is just around the Bagdad expansion. I believe in this slide there is a comment regarding potential for construction to commence in 2023 with a potential 2026 turn out. Could you talk about the progress you've made to date in advancing technical studies as well as any final hurdles to be met before project sanction and early indications of what CapEx might look like for this project?

Kathleen Quirk, President and CFO

Emily, we are starting the feasibility of that project now. We've been working on various scoping-level studies for the past several years as we've discussed, but we are starting the feasibility study, which will define the final cost estimates. We think it'll be efficient, because we've got a lot of infrastructure already in place. We’re adding a new concentrator that takes into consideration the efficiencies gained from the existing Bagdad concentrator in recent years. Once we finalize the feasibility studies, we have limited permitting processes we believe, which gives us optimism that this project could be operational by 2026. We believe the economics will consequently be positive, allowing for efficient expansion of production, effectively doubling output while leveraging the long reserve life, which approximates roughly 80 years.

Operator, Operator

Your next question comes from the line of Lawson Langer from Bank of America Securities.

Lawson Langer, Analyst

Hello, good morning Richard and Kathleen. Very nice to hear from you both, and thank you for today's update. Maybe I can ask about the All-Star Mine. Could you also update us on what's driving the current outperformance? Is that just better recoveries or are there other aspects at play? When we think about the current Lone Star mine and the expansion to 300 million pounds—it's outperforming by 5% or 6%—how should we think about the 300 million pounds? Should we consider it more like 318 million to 320 million pounds?

Joshua Olmsted, Chief Operating Officer

Good morning. Yes, realistically, if we analyze Lone Star and what we've accomplished since commissioning, we leveraged much of what we learned at Bagdad to identify bottlenecks in the process. The team at Lone Star was able to find opportunities that eliminated those bottlenecks while maximizing production incrementally. Regarding the 300 million pounds, that's likely at the limit of our existing hydromet facilities and tank house capacity. While I'm not dismissing the team's ability to find more opportunities to increase output, 300 million pounds is a solid target and close to our current capacity based on available resources.

Operator, Operator

Your next question comes from the line of Christopher LaFemina with Jefferies. Your line is open.

Christopher LaFemina, Analyst

Hi, thanks. Hi, Richard and Kathleen, thank you for taking my question. If we look at the progress reported in the last five or six years, you've obviously overcome substantial challenges, and the company finds itself in a position of clear strength today. Moreover, you are unleashing a massive organic growth pipeline, likely more than we even know at present, due to the substantial resources available. Richard, you also mentioned leaching technologies, which you've discussed previously. How much production potential could we see from these new leaching technologies? What's the time frame? Is it integrated into guidance yet? Furthermore, what does this imply for overall global copper supply and demand?

Kathleen Quirk, President and CFO

We have a small benefit factored into our guidance from Morenci's early successes; however, that's quite modest given the full potential we expect. We are aiming for 100 million pounds to 200 million pounds from leaching in the near-term as we work to enhance our performance in 2022. This translates into greater recovery while minimizing costs, as much of the material is already in stockpiles, which means we can maximize outputs at relatively low additional costs. While this presents a valuable opportunity for us as a company, we don't foresee it as a dramatic shift for overall industry supply in the near future.

Cory Stevens, Project Development Lead

Thanks. No, Kathleen, you encapsulated that effectively.

Operator, Operator

Your next question comes from the line of Michael Dudas from Vertical Research.

Michael Dudas, Analyst

Good morning Richard and Kathleen. My question surrounds the coffee and supply growth, particularly in relation to what you highlighted regarding a tighter landscape. Can you characterize how this perception has shifted from a year ago and now, particularly under the influence of pressing political dynamics in the two largest copper-producing countries? Is it plausible to expect further delays on critical projects over the next six to 12 months as the industry consolidates its approach to navigate relations with new governments? Finally, do you anticipate any additional opportunities arising from these social issues adversely affecting project development?

Richard Adkerson, Chairman and CEO

There’s no question. Just look at our situation at El Abra. If the political atmosphere regarding royalties and the fiscal regime for copper production in Chile were different, we would be advancing rapidly there. What we are doing is preparing ourselves to respond, but we are deferring decisions until we receive clarity from the Chilean government. This is just one example that highlights the broader impact we’re seeing, as some are stalling stability agreements. Companies are facing challenges in regions where they believed they had firm agreements and have had to concede ground in Indonesia to settle the situation, which we did quite favorably.

Operator, Operator

Your next question comes from the line of Alex Hacking with Citi.

Alex Hacking, Analyst

Yes, good morning, Richard and Kathleen, thanks for the call. Just a couple of follow-ups to earlier questions. Regarding Bagdad, would the CapEx for the expansion be classified as planned or discretionary?

Richard Adkerson, Chairman and CEO

Bagdad is completely discretionary. We could continue operating at the existing scale without moving forward if it doesn’t make sense strategically; however, given market conditions and opportunities, it’s likely that we will proceed. We will communicate updated plans as we authorize progress, for which I expect to occur.

Alex Hacking, Analyst

Thanks, and as for producing at the Lone Star mine, does the increased output significantly pull forward the potential for the sulfide project by multiple years, or does that have less impact than we might think?

Richard Adkerson, Chairman and CEO

No, Lone Star's unique development trajectory provides us the ability to profit from the oxide production while simultaneously stripping to prepare for sulfide emergence. The profit generated from mining the overburden, which is the oxide ore, greatly assists us in moving forward. We're simultaneously advancing drilling and economic studies for the sulfide resource—valuably positioned over these deposits.

Operator, Operator

Your next question comes from the line of Carlos De Alba from Morgan Stanley. Your line is now open.

Carlos De Alba, Analyst

Good morning, Rich and team. Can you provide more color on cash costs for the year? Specifically regarding first quarter guidance—with expected higher costs—is there any discrepancy in the guidance you provided for 1Q relative to the anticipated low grades experienced in the first half?

Kathleen Quirk, President and CFO

Certainly, part of this relates to weighing lower costs from Indonesia against higher costs in the U.S. and South America. This is why we don't see fluctuations in the transition from Q1 to the full-year guidance.

Richard Adkerson, Chairman and CEO

As you consider Indonesia ramping up, it was $0.08 per pound in the fourth quarter, and approximately $0.18 to $0.19 per pound over the year. We see costs remaining in that same range with higher volumes moving forward. Our team has efficiently managed costs despite rising energy and input costs, which were our primary avenues of cost control—this has been a legacy since our 2007 structural alignment.

Carlos De Alba, Analyst

Thank you for your insights.

Operator, Operator

Your next question comes from the line of Michael Glick from JPMorgan.

Michael Glick, Analyst

Good morning, guys. Relative to your financial policy, can you remind us how often you'll review the variable portion of that policy?

Kathleen Quirk, President and CFO

Our board formally reviews it at least annually, but we continuously assess it with ongoing discussions.

Richard Adkerson, Chairman and CEO

As an illustration, our recent actions showcase that. Originally we had planned to initiate payout proposals at our first board meeting in 2022, but due to the favorable market and operational progress, we advanced those discussions. Our team operates with real-time planning; we don’t confine ourselves to rigid schedules.

Operator, Operator

Your next question comes from the line of Abhi Agarwal from Deutsche Bank.

Abhi Agarwal, Analyst

Thanks, operator. Good morning, Richard and Kathleen. You referenced your preliminary discussions with the Indonesian government to extend the contract beyond 2041. Can you provide insight on the critical path for that agreement to be finalized?

Richard Adkerson, Chairman and CEO

Yes, we began preliminary discussions, and it’s in everyone's interest for operations to extend beyond 2041. There's a general acknowledgement of the need to move beyond this date. While I can't provide the specifics of structuring these agreements at this time, I assure you these preliminary discussions have been positively received. There's a broad consensus that extending operations is beneficial for all concerned parties.

Operator, Operator

Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research LLC.

John Tumazos, Analyst

Thank you. First on Moly, from as recently as 2017-2018, the output was 95 million pounds. Industry-wide statistics show a reported 5.4% decline in world mine output last year up to November. With global steel and stainless steel outputs rising; do you have opportunities to expand Moly throughput to counterbalance the lower grades at Cerro Verde or other copper mines?

Kathleen Quirk, President and CFO

We have two primary molybdenum mines in Colorado, Climax and Henderson. We did reduce production from these mines when the market was unfavorable; however, we have the ability to respond to increased demands and potentially expand production. We are undertaking some exploratory work now to progress our strategy with molybdenum production in anticipation of increasing demands globally.

John Tumazos, Analyst

Concerning costs in Indonesia for smelting, you're reporting $0.24 in treatment charges and $0.20 in export duties. Would it be correct to think of the costs at approximately $0.18 for exporting concentrates to Asia and $0.30 at your smelter? If it were half and half domestic versus export, am I correct in reasoning there?

Richard Adkerson, Chairman and CEO

Yes, your direction is approximately right. We can provide additional detail to clarify these figures, as our ranges tend to fluctuate around $0.16 to $0.18 per export. Processing within our smelter tends to be much more efficient than opting for exporting on TCRCs, as we speak to both transfer charges and internal capital connected to smelting.

Kathleen Quirk, President and CFO

Consequently, when we consider long-term amortization of smelter capital, the economics will effectively compensate for the export duties. The operational costs, when broken down into cash cost components, should align closely with exporting while not losing sight of the inherent value proposition presented by our smelter operations.

John Tumazos, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Jatinder Goel from BNP Paribas Exane.

Jatinder Goel, Analyst

Thank you, operator. Good morning, Richard and Kathleen, and good afternoon for those in other time zones. A question on your 2024 copper guidance. Could you clarify which operations will face volume drops? You mentioned a 300 million pounds drop year-over-year in 2024, noting that Grasberg remains flat. To what extent are these fluctuations one-time occurrences versus ongoing trends in the years to come?

Richard Adkerson, Chairman and CEO

I’ll let Kathleen and Josh handle that. These mine plan projections will consistently be updated to reflect changes, and sometimes they shift volumes from year to year based on market dynamics or efficiency gains. The ultimate goal is maximizing long-term mine value, so the adjustments are ongoing.

Kathleen Quirk, President and CFO

Specifically regarding the differences between '23 and '24, we are seeing some lower grades particularly in the U.S. operations at Morenci and slightly at Cerro Verde. The impact of these grades accounts for some of the volume changes we see occurring as reflected in our guidance. However, we still aim to capture incremental volumes as we work vigorously towards low capital recovery avenues from various opportunities, including leaching. We have Bagdad delivering growth thereafter, along with other growth opportunities in our portfolio.

Jatinder Goel, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Alex Terentiew from Stifel.

Alex Terentiew, Analyst

Hi, yes, everyone. Thanks for taking my call. Just a couple of follow-ups to questions already asked; first, regarding Kucing Liar and the Indonesian license discussions beyond 2041, how is the pace of investment at that project linked to these talks?

Kathleen Quirk, President and CFO

All our economics will run on a basis relative to 2041, so we're operating on that timeline for now. However, if we achieve an extension, that brings in increased reserves and other resources, which would create added potential.

Richard Adkerson, Chairman and CEO

Despite the years of uncertainty linked to our agreements with the Indonesian government and the existence of resources we have already discovered, we've had to adjust our approach. However, the likelihood is still there that there are significant undiscovered resources in the Grasberg district, awaiting exploration and potential development.

Alex Terentiew, Analyst

That's great, thanks, guys.

Michael Kendrick, Molybdenum Business Lead

Regarding Moly, we definitely view the demand outlook positively considering rising energy needs, both traditional and renewable, that rely on Moly-based materials for manufacturing. Infrastructure developments worldwide bolster the demand for Moly. Our customer bases in Europe and the U.S. demonstrate a positive outlook. Observing China's five-year plan, we also note an upscaling focus on materials, providing optimism for Molybdenum demand.

Operator, Operator

Our last question comes from the line of Carlos De Alba from Morgan Stanley.

Carlos De Alba, Analyst

Thank you very much for allowing me back again. On working capital, Kathleen, the sensitivity you provided on international operations is around $8 billion this year, composed of approximately $1.3 billion working capital and other uses. I'm unclear concerning how much this reflects working capital since this appears bigger than I had anticipated; could you elaborate?

Kathleen Quirk, President and CFO

Yes, we experienced a large benefit during 2021 due to timing with tax payments internationally. Generally, these payments are based on prior-year performance, which can shift based on rising volumes or profitability. Consequently, the timing of tax payments significantly influences these working capital figures.

Operator, Operator

Now, let's go over to management for any closing remarks.

Richard Adkerson, Chairman and CEO

Thank you all for participating in the call today. It is a real pleasure to report great progress our team is making, and we look forward to continuing that progress while being genuinely excited about what lies ahead. Thank you for your interest. If you have further questions or need follow-up, please contact David Joint, and we will respond to you. Have a good day, everyone.

Operator, Operator

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.