In an exclusive Q&A with Critical Resource, Freeport-McMoRan CEO Richard Adkerson discusses the state of the copper market, shares thoughts on political risk and cautions companies to realise when a deal is too favourable for them.
The copper supply issue has not been solved
“In the early 2000s, when China emerged as a major copper consumer and the world was coming out of a period of economic weakness, we developed a long-term view on copper that we continue to hold today. Not only was there a major change in consumption because of the growth of China and other developing countries, but there was a new environment that resulted in a scarcity of supply. Historically, there had always been known copper deposits around the world that could be developed and come onstream when the business cycle turned up, eventually causing prices to fall. As China emerged, the received wisdom was that the past would be repeated and higher prices would be matched with new supplies. However, geologically, this time new projects were of a lower grade and increasingly underground, which was compounded by the emergence of social license issues and resource nationalism further constraining supplies. What’s striking is that this supply issue has not been solved.
Copper demand in the near term will depend on the global economy and China. For a long time, there were predictions of impending doom in China, but it has held up remarkably well. Going into 2018, we felt it was a great time for the industry – there was synchronised global growth, commodity traders had long positions in copper and prices were around $3.30. In June, the US government announced the first tariffs and while inventories were low and copper demand initially remained robust, in 2019 we have seen the real fallout of the trade war as Chinese growth and US manufacturing have weakened. It’s in everyone’s interest to find a resolution but where we go from here is uncertain. Nobody can predict these short-term events, but as a company we have to be prepared for different scenarios and make appropriate decisions in response. As Freeport, we try to do that in a way that is supportive of our long-term positive view of copper.”
Freeport is not considering any strategic moves – we are laser-focused on three things
“Freeport is in a special situation because of the transition of Grasberg from the open-pit mine to an underground operation. In addition to the near-term effect of economic uncertainty in terms of reluctance for us and others to make investment decisions, we’re also in a trough period for production. With success in the underground conversion, which I’m confident we’ll have, we’ll be doubling our cash flow within two years.
During this period, we’re not considering any strategic moves as a company – we’re not looking at M&A or making new major investment decisions. Instead, we are laser-focused on three things. In addition to the underground development at Grasberg, we have been undertaking a major productivity initiative that is yielding promising results at our operations in the Americas and which we are planning to roll out to our other operations. Thirdly, we’ve got a special mine development project in Arizona, the Lone Star project, which initially will make use of excess capacity in processing facilities at our adjoining Safford operation. Our exploration work indicates longer-term potential for Lone Star to become a keystone asset for our company.”
Companies should recognise a deal that is too good
“People feel strongly that the natural resources of their countries belong to them, and this spans from places like Papua to the Congo to the US. The problem that companies face is that they have to make enormous upfront investments to develop a resource. The good news is that they have very long lives and can generate a long stream of cash flows if managed well. On the other hand, even though you may have a deal with a current government, operations last so long that governments and policies will change. Particularly if commodity prices go up and you’re suddenly making a lot of money, it becomes politically attractive for people to publicly demand more for the country.
My hope is that our situation in Indonesia can serve as an example of aligned interests and a long-term, sustainable deal based on fair sharing. We’ve had opportunities presented to us to do business in certain countries that were simply too generous – companies, like governments, should recognise the mutual benefits that arise from fair sharing.”
Political issues will always be tough
“We sold our asset in the Congo three years ago. Since then, the country has seen electoral turmoil and difficulties changing its mining law, with companies put under pressure. We went into the Congo in 2008 when no other major company was willing to do it. People didn’t think you could conduct business there without being corrupt, but we did it and helped the country to establish a track record of greater reliability in developing assets. I recently met with the new president of the Congo who asked me to explain Freeport’s decision to sell Tenke Fungurume and what it would take for us to return. I noted the decision was purely financial and emphasised the importance of having an environment that gives people confidence in investing capital there.
Thankfully, corruption is being condemned almost everywhere these days, but jurisdictional risk is prevalent around the world, be it in African countries, Mongolia, or the US where the Pebble mine in Alaska has been held up and Rio Tinto and BHP are facing challenges with the Resolution Copper project in Arizona. In Chile, Freeport in the 1980s had the opportunity to buy the interest in Escondida that Rio Tinto ended up acquiring but declined to do so due to political risk considerations. Chile then developed into one of the strongest economies in South America and was seen as stable until the protests erupted this October. All of these things are happening, but I don’t think there’s anything new coming up – political issues will always be tough.”
As an industry we need to double down on our efforts on ESG
“The degree to which ethical investors really understand the mining industry varies. Sometimes the analysis is shallow and philosophically driven. We have a long history of proactive engagement with ethical investors related to site-specific requirements of our controlled riverine tailings management system in Indonesia. This system was thoroughly studied and approved 20 years ago and today operates as it was designed to – there is natural revegetation within the tailings area and the whole area can be restored to the tropical rainforest setting it was beforehand. I recently visited the site and was very pleased to see the natural revegetation developing in many areas. The tragic Brumadinho disaster also validates our decision not to build a traditional tailings retention area given the severe terrain, heavy rainfall and earthquake risk in Papua.
This has been difficult to communicate with some stakeholders as there is sometimes a knee-jerk reaction that any use of a river for tailings transport is wrong. However, I’m not frustrated by that. There need to be countervailing forces to protect the environment and to promote sustainable development for communities and social justice. While it can be a challenge to engage in a substantive way, I wouldn’t want a world to exist where those things don’t happen. At the same time, as a company and as an industry we need to double down on our efforts to help people understand the social good that we create and the economic necessity inherent in mining resources. Look at what Freeport produces – copper is essential for the energy transition. But we also need to make sure we do things in the right way and communicate our commitment to that.”
Richard Adkerson has served as President and CEO of Freeport-McMoRan Inc. (FCX) since 2003, having served on the FCX Board since 2006 and joined the company in 1989. He is a Council member and former Chairman of the International Council on Mining and Metals and serves in numerous non-profit and philanthropic roles.