Freeport Trims Copper Output But 'Confident' About Long Term

Freeport McMoRan Copper and Gold Inc. (FCX) is scaling back copper and molybdenum operations and reducing capital expenditures in response to sharply lower prices in late 2008, yet it remains "confident" about longer-term prospects for the commodities and its business, a company official said Monday.

Speaking in a Webcast following the release of fourth-quarter earnings, Richard C. Adkerson, president and chief executive officer, said there are ongoing limitations in global copper supplies. He also suggested that developing nations such as China can be expected to continue consuming copper to develop infrastructure as the world economy recovers.

Freeport, the world's largest publicly traded copper company, reported a fourth-quarter loss of $13.9 billion, or $36.78 a share, in a turnaround from its net income of $414 million, or $1.05 a share, in the fourth quarter of 2007.

However, special items totaled $14 billion. Of this, $13.1 billion reduces the carrying value of inventories, long-lived assets and goodwill from the March 2007 acquisition of Phelps Dodge. The non-cash charges were required by accounting rules due to lower commodity prices, officials said.

When adjusting for all special items, fourth-quarter adjusted net income totaled $23 million, or 6 cents a share.

Freeport said copper prices averaged $3.61 a pound during the first nine months of 2008, then fell to a four-year low of $1.26 in December. Molybdenum declined to $8.75 in November after averaging $33 a pound in the first nine months.

In response, the company said copper output will be reduced in 2009 to 3.9 billion pounds, or 9% from the 4.3 billion estimate made in October. Freeport anticipates a further reduction to 3.8 billion pounds in 2010, compared with the October expectation of 4.6 billion.

For molybdenum, expectations are for 2009 output of 60 million pounds, revised down from 80 million pounds as of October.

Budgeted exploration spending will be cut to $75 million in 2009 from $248 million in 2008. Capital expenditures will be cut from $2.7 billion last year to $1.3 billion in 2009 and $1 billion in 2010.

Projected gold sales were not impacted by the company's revised plans and are expected to be around 2.2 million ounces in both 2009 and 2010, Freeport said.

"We are taking steps to limit capital expenditures and drive our cost of operations down so that we are cash-flow positive, even at low prices," said Adkerson.

But while global copper inventories are rising at a time of low prices, Adkerson said, this nevertheless has been limited by certain ongoing supply constraints.

"When we look at where our business is and what we're doing to be responsive to these conditions, we continue to feel confident about the long-run outlook for our commodity," Adkerson said.

Global mine supply in 2008 was virtually flat compared with 2007, he said.

"Underlying all of this current economic downturn is the basic problem that the industry is challenged to find new supplies of copper, and the copper that is being produced by existing mines is being limited by falling grades and operational issues and other factors," Adkerson said.

Freeport may have written down the value of its inventories, but the company still has the same assets.

"We haven't walked away from any of our resources or any of our growth opportunities," he said. "It points to a bright future for our company.

"These current market conditions will be supportive of the long-run outlook for copper and molybdenum. In the long run, as China and the developing world continue to acquire infrastructure, and as the global economies recover, we are going to be positioned to take advantage of that."

Most of the cuts in Freeport's 2009 copper output will be at North American operations, Adkerson said. This previously projected output was trimmed by 360 million pounds.

"This allows us to take North American operations and put their costs down at a level that is cash-flow positive at $1.25 copper," he said.

Consolidated sales from mines in the fourth quarter totaled 1.197 billion pounds of copper, which was 36% higher than in the fourth quarter of 2007 and slightly higher than the December 2008 estimate of 1.165 billion pounds. Fourth-quarter gold sales of 462,000 ounces were nearly three times higher than in the fourth quarter of 2007 and 16% higher than the December estimate of 400,000.

Freeport said consolidated sales of copper and gold were higher than a year ago, mainly because of higher ore grades at the Grasberg mine, and topped the December estimates, mainly because of slightly higher production and the timing of shipments.

Meanwhile, fourth-quarter molybdenum sales of 12 million pounds were lower than the year-ago period sales of 19 million due to slowing demand and revised mine plans.

For all of 2008, sales totaled 4.1 billion pounds of copper, 1.3 million ounces of gold and 71 million pounds of molybdenum.

The company reported preliminary copper reserves at the end of 2008 rose to 102 billion pounds from 93.2 billion at the end of 2007. Molybdenum reserves rose to 2.48 billion from 2.04 billion, while gold reserves fell to 40 million ounces from 41 million.

Higher gold output in 2009 and recently strong prices means the byproduct credit for gold should essentially cover all of Freeport's copper-mining costs in Indonesia, Adkerson said.

For 2009, the company listed site-production and deliveries costs at its Indonesia copper operations of $1.10 a pound, with royalties of 6 cents and treatment charges of 20 cents. This totals $1.36 for copper, but the byproduct credit is $1.37 a pound, meaning a negative unit cash cost of a penny a pound for copper.

For all copper operations around the world, after byproduct credits, the unit cash cost is estimated at 71 cents a pound, down from $1.16 last year. The 2009 estimates include $1.17 at North American operations ($1.33 in 2008) and $1 in South America ($1.14 in 2008).

-By Allen Sykora, Dow Jones Newswires; 541-318-8765; [e-mail]

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