Freeport-McMoRan Copper & Gold (FCX) Q4 2017 Earnings Conference Call Transcript

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Freeport-McMoRan Copper & Gold (NYSE: FCX) Q4 2017 Earnings Conference CallJan. 25, 2018 10:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Fourth-Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

If you wish to ask a question during the Q&A session, press *1 on your touchtone phone. If you require assistance during the conference, please press *0. I would now like to turn the conference over to Ms. Kathleen Quirk, executive vice president and chief financial officer. Please go ahead, ma'am.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Thank you and good morning and welcome to the Freeport-McMoRan Fourth-Quarter 2017 Earnings Conference Call. Our results were released earlier this morning and a copy of the press release and slides for today's call are available on our website. Our conference call today is being broadcast live on the internet. Anyone may listen to the conference call by accessing our website homepage at fcx.com and clicking on the webcast link for the conference call.

In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements and actual results may differ materially. I'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings. On the call today are Richard Adkerson, our chief executive officer.

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We also have Red Conger here, Mark Johnson, and Mike Kendrick. I'll start by briefly summarizing the financial results and then turn the call over to Richard, who will be reviewing our performance in the slide presentation that's included on our website. After the prepared remarks, we will open up the call for questions.Today, FCX reported net income attributable to common stock for the fourth quarter of 2017 of $1 billion with $0.71 per share. The results include net gains of $291 million, or $0.20 per share, primarily related to tax benefits associated with U.S.

tax reform totaling $393 million, partly offset by charges for adjustments and environmental obligations. The benefit from tax reform principally relates to the appeal of the AMT and a refund of our AMT carry-forward. After adjusting for these net gains, the fourth-quarter 2017 adjusted net income attributable to common stock totaled $750 million, or $0.51 per share. For the year our net income attributable to common stock totaled $1.8 billion, or $1.25 per share, compared to a net loss attributable to common stock of $4.20 billion, or $3.16 per share for the year 2016.

For the fourth quarter of 2017, our adjusted earnings before interest, taxes, and depreciation and amortization, or EBITDA, totaled $2.1 billion and $6 billion for the full year. A reconciliation of our EBITDA calculation is available on our slide materials on Page 37. For the fourth quarter, FCX sold 1 billion pounds of copper, 593,000 ounces of gold, and 24 million pounds of molybdenum, and for the full year we sold 3.7 billion pounds of copper, 1.6 million ounces of gold, and 95 million pounds of molybdenum. Our fourth-quarter average realized copper price of $3.21 per pound was 29% above the year-ago quarter average price of $2.48 per pound.

Our average unit net cash cost for copper was $1.04 per pound for the fourth quarter of 2017 and average $1.20 per pound for the full year, and that compared to a $1.26 per pound for the full year of 2016. We generated strong operating cash flows in the fourth quarter, totaling $1.7 billion, which exceeded our capital expenditures of $390 million. For the full year our operating cash flow totaled $4.70 billion and capital expenditures were $1.40 billion. We used our strong cash flows to improve our balance sheet during the fourth quarter.

We repaid $1.70 billion in debt, and that included the early redemption of $617 million of senior notes due 2020 and open market repurchases of $74 million of notes due in 2018. At the end of 2017, our consolidated cash was $4.40 billion and consolidated debt totaled $13.10 billion. Our debt net of cash of $8.7 billion at the end of 2017 was $3.1 billion less than at the start of the year and $11.4 billion less than the level two years ago. We entered the year with no borrowings under our bank credit facility and approximately $3.5 billion available.I would now like to turn the call over to Richard, who will be providing additional details on our results and our outlook.

Richard Adkerson -- Chief Executive Officer

Good morning, everyone. Thanks for joining our call. 2017 results reflect really strong operating performance throughout our global operations, as Kathleen just described. It also reflects the success of our ongoing cost-management and capital-discipline efforts, strong cash flow generation, we restored our balance sheet strength, developed attractive organic growth options for the future and we made important and positive progress for the long-term stability of our operations in Indonesia.

Most of you have been here and watched our company for some time. Just think about where we were two years ago. We had just lived through, as the industry had, significant drops in commodity prices. The price of copper was just over $2 a pound.

Many expected it to drop below that. We had the issue of having $20 billion of debt following the misplaced oil and gas transaction that we did. We had restructured our board, restructured our management team and were faced with deleveraging. At that board call, one of you pressed us to say what do you expect your debt levels to be.

We weren't sure at that time. I said we hope to reduce our debt between $5 billion and $10 billion over the next two years. We're under $9 billion as we ended the year this year. We were faced with the completion of our Cerro Verde project in Peru, which was a major project, which often are troublesome for the industry.

We did not know what we were going to do with the oil and gas assets at that time -- there were no buyers in the marketplace in the first quarter -- but we successfully exited that business. We thought we were going to have to hold those assets for a period of time. Many who followed our company were skeptical of our ability to sell copper assets at reasonable prices and through working with our partners Sumitomo and Morenci, with China Moly, which turned out to be a great partner to deal with in the Congo, we were able to get reasonable values at the time, great investments for those companies because they recognized the long-term values and the values in the copper marketplace. We had to sell some equity but we fought our way through that.

A year ago, in October 2016 -- I went back and looked at my notes from LME Week -- there was still people predicting a wall of copper supply, still predicting copper prices in October 2016 of $1.80 a pound. Surprised on the upside they were above $2.50 a year ago but we were blindsided by new regulations that had come out from the government of Indonesia that raised questions about our contract there. They came out in January. Since that time I've spent as much time in Jakarta as I have in Phoenix.

Kathleen's been there on my last five trips and we were pleased that after facing the prospects of a very contentious arbitration proceeding, which we talked about publicly in the first quarter, we have reached common grounds for moving forward with the government of Indonesia. We now mutually want to get this thing solved. We made a lot of progress and I'll give you a report on where we stand and answer your questions, but through 2017, the price of copper came back. So today we have a company that has a really great set of long-lived, attractively operating-cost-profile assets and resources.

I'm so proud of our team. I have Red Conger here, who runs our business in the Americas, Mark Johnson, who runs our business in Indonesia, Mike Kendrick, who runs our molybdenum business, and Rick Coleman, who does our construction projects, who's traveling, but these guys and their teams just had an exceptional year this year in executing our plan and being focused on doing that while we dealt with the issues associated over the last two years with balance sheet management dealing with Indonesia. We got a great team and this team has executed extraordinarily well. You can go back to the early 2000s when we had to deal with a serious balance sheet issue.

The successful integration and debt repayment following the Phelps Dodge deal in 2007 where we successfully repaid all the debt that highly leveraged transactions within four years after managing ourselves through the financial crisis of 2000-2009. By 2011 we had a company with no debt, had an integrated team that is the best copper operating team in the industry.Metrics are shown on Page 4. So, the key thing that jumps out is free cash flow generation during 2017. The first part of 2017 was tough in Indonesia.

We were restricted on exports for a period of time. We had significant labor problems. By midyear we were exporting and continue to export and expect to be able to continue to export. Our labor relations issues have been really progressed, new union leadership in Indonesia.

We signed a new two-year labor contract in December without any controversy or drama associated with it, but even with the issues at the start of the year, we generated over $3 billion of operating cash flows in excess of our capital expenditures. You can see our cost structure. We maintained our reserves and, as I mentioned, we have really reduced our balance sheet. As we look forward to our plan for next year, if copper prices remain at roughly the current levels, the debt level -- when I say next year, this year, 2018 -- we should end the year if we use all of our cash flows to reduce debt at a level in the area of $5 billion.

So, $20 billion to $5 billion is a great progress.Copper market commentary is as positive right now as we've seen. Demand is growing throughout the world. For a number of years, many years China was the sole source of growth globally. Today, China's continuing to grow.

Their economy is better than people expected, as you've seen. They appear to have dealt with their banking issues -- that was a big concern -- probably still a risk, but growth in Europe, growth in the United States, growth in Japan. Just tune in to the comments at Davos that's going on right now and you can hear the positive comments about the global economy, and all that reflects a stronger copper demand.Supply side issues are still there. Analysts and consultants who follow this business are expecting 2018 to be the first year of lower copper production after providing for disruptions than the prior year, first time that's happened since 2011.

The industry supplies reflecting a very long period of under-investment and, even as we speak today, with higher prices, we don't see a wave of new investments being started immediately. So, there's a real absence of major new project on the horizon, declining production from existing mines, exchange stocks are low. So, what McKenzie is talking about, having a need to balance the market of 5 million tons of new projects over the next decade with the long lead times, the few world-class opportunities, with the new uses for copper -- transportation and power generation, and so forth, the outlook for copper is positive going into 2018 and very positive for the long term.Now, the next -- Slide 6 shows where we stand in the industry. Clearly, a leader.

We operate all of the mines that we are invested in and if you were to look at the production of our partners in mines that we operate, we operate the leading amount of copper production in the world. Large-scale technical capabilities in all forms of copper mining, whether it's SX-EW, open pit sulfide projects, underground mining, particularly block caving, where we've been experienced in block caving since the early 1980s, we have a strong technical team that's a huge, huge benefit for our company. So, that's really strong competitive advantage.The supply situation, I think, is reflected on Page 7, where we have a listing of the largest copper mines in the world in terms of reserves and production. Notably, there are no mines here that have been discovered in the last 10 years.

In the last 20 years the only two mines are Oyu Tolgoi and Las Bambas. Everything else is old ore bodies. Now, because we don't have new greenfield projects of size in the imminent outlook for copper supply, it makes it more significant these ground-fill opportunities that we have with our ore bodies, and we'll talk more about those. Besides our technical capabilities, I think the real strength of our company lies in our current resource base.

So, we're a big producer at about 4 billion pounds a year, but we have proved and probable reserves of 87 billion pounds, mineralized material of another almost 100 billion pounds and potential of 150 billion pounds. All together, that's 335 billion pounds. Now, what does that mean? And, by the way, of the total, half of that's in North America and today in North America with our cost advantage that we have here in the United States that's come about because of the shale revolution in natural gas and crude oil with the improved regulatory situation that we now have and with the very flexible work force, which allows us to deal with changes in our business whether we're expanding or having to reallocate resources, the support we get from states and local communities is a big advantage of investing in the United States, which is still, from a political-risk standpoint, the best country in the world, and now with this new tax bill, that's another advantage. Now, we're not like most transnational companies in the United States.

We were already paying higher tax rates outside the United States than inside the United States. We also had a very large, and we continue to have a very large loss carry-forward for the oil and gas business. So we don't have the issue of repatriation of taxes or much lower current tax rates but we do benefit from the fact that the AMT provisions were repealed. That's going to allow us to file for refunds over the next four years or so of $400 million to $500 million as additional cash.

The tax law retained percentage depletion for mineral resources. So, even looking out beyond the time that we have this, and it's a long period of time with these loss carry-forwards, the new tax law is of benefit to us long term.So, what we've got beyond our proved and probable reserves is really a great deal of optionality for the future. Our strongest assets in the mining industry are long-lived assets. With long-lived assets you don't face reinvestment risk.

You don't have to have success with greenfield exploration. You don't have to make acquisitions when you have a resource base like the one that we have, and it's not limited to any single mine. We have a very large footprint, with five operations in the United States that have very large sulfide resources that we have identified, and over time I'm convinced that the world's going to need the copper out of those. In South America we have a really attractive project in Chile with our El Abra project, where we're partners with Codelco to develop a large sulfide resource.

Lots of capital, lots of studying to be done. We're doing studies now. We haven't committed to spending capital on it but we're preparing ourselves to. We have a couple of attractive exploration projects.

We had an exploration project in Serbia, where we entered into partnership with Nelson, who is continuing to do drilling and they're looking to develop the upper zone. The lower zone is of size and we have a significant position in it. And while we sold our Tenke Fungurume project in the Congo, we still own an undeveloped resource that's in the area called [Inaudible]. It's, we believe, the largest undeveloped cobalt deposit the world.

It's permitted and we're looking at the opportunities of developing it or entering into partnerships with other operators there in the Congo. We have a lot of interested people willing to buy it outright but it gives us a lot of options to consider with this big resource. And in the Grasberg district while we have clear-cut plan of developing and operating through 2041, there's significant resources beyond that, and in time they will come into play.Looking at the Americas, it was really strong performance. Congratulations, Red, and your team.

In the fourth quarter we sold 666 million pounds of copper in that quarter alone. As I mentioned earlier, this Cerro Verde expansion, that concentrator averaged 374,000 tons per day in the fourth quarter. That's on a 360,000-ton nameplate. I believe it's the largest concentrator in the industry and is operating very effectively.

We continue our focus on cost and CAPEX management. Some factors are coming into increased cost at the margin. With the higher copper prices our margins are growing, but we continue to be disciplined in the way we spend money. We are advancing these studies for looking for future growth but you can just see what a great business this Americas business is.

In the fourth quarter we had $455,000 million of cash flow after CAPEX, for the year over $2.5 billion. Still in our memories a time when it was said that the Southwest copper district in U.S. was dead. Now, it's profitable with major opportunities to invest capital and employ people.

our company supplies more than 40% of the copper to the U.S. and we're going to continue to take advantage of that. The sulfide projects in the Americas include five projects in the U.S. and the El Abra project in Chile.

These reserve numbers we're using are still based on a $2 copper mine plan, so there's significant upside of higher prices both in our reserves and resources. We're monitoring market conditions. We're going to be very disciplined in deciding when to go forward with it, but it's a strength of our company.One project we are moving with is the Lone Star oxide project. This has been a resource that's been known for decades in the industry.

It's located 7 miles from our Safford mine, which is just across the mountains from Morenci in eastern Arizona. We're going to start, or we are starting, with a project to mine an oxide cap to this big sulfide project. The current project has reserves of 4.4 billion pounds of copper. The capital would be $850 million spent over several years.

We are commencing prestripping activities in the first quarter of this year. While this will serve to strip cover over the big sulfide resource, it's going to be done in a very profitable way, because we're going to take that oxide material, transport it the Safford processing facilities. Safford is a mine which is declining. It had a limited life.

It has a big sulfide resource at depth but now we're going to be able to use the facilities at Safford to mine this oxide ore and cap production of 200 million pounds a year for 20 years, unit cost of $1.75 with over $1 billion of MPV at 350 copper. So, it is a good project but what it does, it gives us exposure to a sulfide deposit lying underneath the oxide deposit that has 60 billion pounds of contained copper. Now, this would involve ultimately development of a big concentrator mill and so forth, but it's an attractive way to get exposure to that big resource. And we're showing the drilling that we've done to date that defines the resource in our 2017 drilling, which we spent a bit more money on than we had originally budgeted, but showed the extension of this sulfide resource.

It was very positive and, as you will note, you've got some attractive grades that are in the current outline for the resource, but these deeper holes continue to encounter attractive grades going forward. So, this is a great current and future opportunity for us.In Chile, the El Abra sulfide project is a good project. This is really a good project. It's a big project.

It is in our inventory. We're working with our partners. We're working with other landowners in the region to see if we can cooperate with them. It's at altitude and requires a saltwater desalinization project and transportation of that water up high.

It's a big investment but it's 2 billion pounds of 0.45 copper. Our current expectation is that it would involve the building of a 240,000-tons-per-day concentrate, similar to Cerro Verde. Could produce 750 million pounds a year. It's a six to eight lead time and we're engaged in prefeasibility study and permitting planning now.

So, it's something that will develop over time. We're in no rush on this but it's going to be a great project for Freeport in the future. And you can see the results of drilling that have been done to date, you can see the reserve pit that has been identified, the mineralized material shell, and the continuation of mineralization with our deeper drill holes as we go forward. Now, in Indonesia.

So, Mark, I want to again congratulate your team for meeting the challenges that we faced at job site while we've been dealing with this attention on the negotiations with the government. I mentioned earlier we had exports disrupted. We had labor problems and the labor situation is so much better now than it's been since going back to the 2010 time frame. We've had some security issues.

Papua was always going to be a complicated place to operate but in the last couple of months we've had some security issues. The thing that's encouraging now versus previous times is we're getting great cooperation from the Indonesian authorities. The head of the police who had previously served in Papua is totally engaged. I got to know General Tito a number of years ago he's very well-regarded in the government.

He understands it and he's committed to help us as the new head of the military and they are working together with the police. So, you can see the results of that. I know there's continued concern about the uncertainty about our contract and so forth, but the balancing deal we've been working with is to progress the discussions with the government and take advantage of this high-grade ore that we've had available to us as we mine the pit. My first trip there was 1988 when the second drill hole had been drilled at Grasberg.

I took a little picture of the exploration shack. Where I took that picture, today there is a pit that's a kilometer deep and 2 1/2 kilometers across that since that drilling has been developed. We're at the very final stages of mining the pit, very little waste material to move, very high-grade core of this ore body and we will be mining that for the next year or so. And so what that has generated for us this year, including negative impacts that we suffered at the first of the year, is over $10.5 billion of free cash flow.

That's important to our company. Now, what is really important to our company is getting the rights to operate through 2041 and I'm pleased to report those negotiations are advancing in a mutually amicable way. We have very good working relationships with the ministers that have been assigned to represent the government on this. The negotiations are at times challenging as all negotiations are, but we have mutual respect, positive views about each other, and a mutual objective of getting to this stability.

Now, what we are pushing for is having fiscal and legal certainty for our long-term mining operations, and that's through 2041. And that certainty means that we end up with an agreement that gives us those rights preserved so that they can't be changed by future laws and regulations, and the government has accepted that. We have agreed to provide financial benefits to the government that are in excess of those under our current contract and that's principally by paying higher royalties, we've agreed to pay higher royalties. We've agreed to two things that the Indonesians have really described as being nonnegotiable from their perspective.

One has to do with building new smelter capacity, and we're approaching this with a commitment to do it. We told the government that we would do it in conjunction with getting this extension. We're working now at looking at a partnership with a company called PT-Amman, which acquired Newmont's mine in Sumbawa, the Batu Hijau mine, and it would make sense for us to do something together. So, we're talking about that but with any event, we've committed that within five years of signing a definitive agreement, we will build this new smelter capacity and do it in as cost-efficient way as we can.

We've also agreed, and again this was a nonnegotiable point with the government of Indonesia, that we would work to give the government a 51% interest in the project in what is actually a joint venture operations for the Grasberg operations between us and our joint venture partner, and we said we would do that so long as we got fair market value for any divestment and that fair market value would be based on valuations used internationally for resource assets, and the government has agreed to that. We also said we would do it so long as Freeport would continue to have control over operations and the governance of the business. Very complicated business, we've invested billions of dollars to date. We're going to be managing other multibillion dollars of investments as we go forward.

I'm not stretching to say it's the most complicated mine in the world because of its physical location -- it will be the largest underground mine ever developed. Environmental issues are very challenging. Community issues are challenging. We will work together as partners with the Indonesians and provide them with meaningful participation in it but we need to make sure that it's run in the right way.

As I said, we're the best copper miner in the world. The government's state-owned business has some mining experience but it's not anywhere near the scale of ours or with the complexity of ours and none within the copper business. So, we have this mutual objective of completing the negotiations and going forward. Our temporary IUPK has been extended to June.

Our contract of work stays in place, the government has agreed to that. We're exporting, we expect to be able to continue to export, and we're going forward. We're aware that the government is engaged in discussions with our joint venture partner about the potential of acquiring their interest. In preparing for that, they're going through a process of doing due diligence to build a record to show that they understand what they're doing.

And we are cooperating with that, providing them information, meeting with them. So, we're helping to facilitate a transaction. That transaction would be the best outcome for all parties, I believe, provided they can reach agreement on valuation. The valuation negotiations are between the government and our joint venture partner.

That's a separate interests from ours. So, we're facilitating the process but that's part of the negotiations that we don't have control over. But all that's moving forward, as I said. A whole new attitude about getting there.

The government recognizes we need to continue operating. They need the revenues in terms of their taxes and all of these. They need to have employment in Papua. And all that translates to our continuing to generate cash flows.So, where we are with Grasberg today is we are completing the mine's open pit.

Development started in the early '90s in one of the great mining operations. Most years we were moving 700,000 to 1 million tons a day and now it's coming to an end, but it's the same ore body that extends down to depths where it's more economical to mine underground. So, that's what we've been focused on, is the development of the Grasberg block cave. Now, we're currently producing from an adjacent mineral system that we began mining in the early 1980s and we've continued to mine at deeper horizons and expanding it, and this mine currently that we're mining from is the DOZ, the new mine is the deep MLZ, which we began production in in 2016 and we continue to have the opportunity to expand this resource as we go forward.So, add this all together.

Our plans call for us to process through our mill from the underground ore at rates of about 240,000 tons per day for the long term, continuing to 2041. And if you look at the next Slide 18, while all of this has been going on with the government and the labor and everything else, our team has just been plugging away at developing this Grasberg block-cave infrastructure and we are virtually completed. We've got access to the underground. We can't start developing the block caves until we complete mining from the pit.

We are now completing the ore delivery system. There's actually a train involved with this and that will be done this year so that by the end of the year, we'll be ready to turn the switch on, stop mining from the pit, start mining from the underground. Now, this has been a challenging high-risk project and Mark and his team has done just a great job in focusing on that and getting that done and I will say that the risks of doing that are now behind us. Once we start managing the underground, we're going to be ramping up to where this mine will produce 1 billion pounds of copper a year, very significant, 1 million ounces of gold a year on average, and that will give it a really attractive cost structure.

I don't do this very often but just to put this in perspective of what we have here in the Grasberg underground, it's just under 1 billion tons of ore, with a copper equivalent approaching 1.5% when you add the gold into it. Las Bambas has just over 1 billion tons of ore. They have 0.8 copper equivalency. We would produce over 30 billion pounds of copper equivalence, they have about 20.

Cobre Panama, which is a great resource, has over 3 million tons of ore but a grade of 0.4 -- 3 billion tons of ore but [Garbled] 4.45 copper equivalence. So, compared with other great ore bodies around the world, this is certainly going to be one of them and one which we will make a lot of money off of. So, the key milestones that we've completed to date are shown on Slide 19: 220 kilometers of development, mine access, shaft, ventilation, rail connection, crushers, batch plant. And so, we've got work to do this year but, as I said, my view is the risk of development has been met.Now, what does Indonesia to get out of this? Well, it's a very attractive deal for the government [Inaudible] their existing [Inaudible].

To date, they've gotten almost 60% of the financial benefits of the total operations. We've been there 50 years, the Grasberg was discovered in the late '80s. Since 1992, when our most recent contract came into place, we've contributed $60 billion to their national GDP, the largest employer in Papua, one of the largest taxpayers in Indonesia. We've contributed over $700 million since 1996 voluntarily to a community development fund and as we look forward, for the government, future taxes, royalties, and dividends through 2041 would exceed $40 billion.

Good deal for the government. Good deal for our shareholders.2018, our guidance continues the same at about 4 billion pounds of copper. 2.4 million ounces of gold, over 90 million pounds of molybdenum, which, by the way, is having a more positive price environment right now than we've had in recent years, attractive site production, delivery cost of $1.60 after byproduct credits of about less than dollar a pound, and operating cash flows at 315 copper would exceed $5.8 billion, highly leveraged copper prices, each $0.10 is $360 million, roughly $2 billion of CAPEX, including $1 billion on the underground development in Indonesia and the development of Lone Star project and about $1 billion for other mining-sustaining capital, some of which has been deferred in recent years but clearly, great cash margins over CAPEX.Our unit cost by area in North America, South America, and Indonesia are shown on Page 22, as well as our sales by region. I'll just make reference to that since I've already talked about it.

Our sales profile, as we look forward, for the next two years, 2019 will be a transition year. We expect moving from the open pit at Grasberg to the underground, while we're developing stockpiles and so forth, there will be an interim drop in production which we will build back up to an average over the next two years of approaching 4 billion pounds and you can see that with our outlook for gold production.Quarterly sales are shown Page 24 for this year, 2018, and then Page 25 shows the model that we show each year for the next two years. Given EBITDA and cash flow numbers at 325 copper, we would have average 7.3 EBITDA, $5 billion of operating cash flows. 2018 will be higher than this average because of the transition year in 2019 and the sensitivities for the metals that we produce and the currency is presented on Page 26.

Capital expenditure outlook, which I referred to earlier, is on Page 27. Just note that this does not include spending on a new smelter in Indonesia and we're looking at financing alternatives to finance that aggressively with project-type financing for the smelter. So, just going back to what we've done with our balance sheet improvement over the last two years and in the year at $8.7 billion and if we use all excess cash flow, execute on our plan, realize these copper prices, you can see that our debt would drop significantly during this upcoming year because of strong commodity prices.So, in closing, we're really optimistic here about our company, about the outlook for copper and its long-term fundamentals. We like being the industry leader.

We have a lot of Freeport people that listen to this call and for all of you on the call, in front of our investors and analysts, I just want to tell you how much me, the board, and senior management team appreciate what everyone's done this past year. It's been a challenge. We've had to support each other, build our morale up to come back. Two years ago the market was telling us through the CDS trading that there was well over 90% outlook that this company would default on its debt.

That's two years ago. Now, our credit default swap has gone from a high of 2700 basis points to below 150 basis points. We're going to get better. I expect our credit rating to increase over time but what I'm really proud of is what this team has done.

We've shown our mettle. We continue to do that. I couldn't be more proud to be part of it and look forward to 2018 to be a year of ongoing and major progress and accomplishments.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Operator, we can take questions now.

Questions and Answers:

Operator

Ladies and gentlemen, we'll now begin the question-and-answer session. If you wish to ask a question, press *1 on your touchtone phone. If you question has been answered or you wish to remove yourself from the queue, please press the # key. If you are using a speakerphone, please pick up your handset before pressing the numbers.

One moment please for our first question.The first question comes from the line of Alex Hacking with Citi. Please go ahead.

Alex Hacking -- Citi -- Analyst

Hi, good morning, Richard and Kathleen. Regarding Grasberg and the potential that the government might buy the 40% stake from your JV partner, Rio Tinto, how likely do you think that outcome is? Is that now the most likely outcome in your view?

Richard Adkerson -- Chief Executive Officer

It's at a stage of negotiations. So, you don't want to get ahead of those negotiations. It appears to be the desire of the parties to do that, so I would characterize as a most likely outcome.

Alex Hacking -- Citi -- Analyst

OK, thanks, Richard. And can you remind us of what Rio Tinto's CAPEX commitment is to developing the underground and would you expect that in the scenario where the Indonesian government buys Rio Tinto's stake that they would also assume that share of CAPEX commitment? Thank you.

Richard Adkerson -- Chief Executive Officer

Yes, we have an understanding with Indonesian government that in the event that they do a deal with Rio Tinto, Freeport's economics under the existing joint venture agreement would be preserved. Alex, do you understand what I say?

Alex Hacking -- Citi -- Analyst

Yeah, I understand that clearly. Could you just remind us what Rio's commitments are?

Richard Adkerson -- Chief Executive Officer

All right. Well, it's complicated in that -- this joint venture agreement is relatively complicated because under the agreement, which was signed in the mid-1990s, certain projects are designated as expansion projects and certain projects are designated as replacement capital. Rio Tinto placed 40% of the expansion projects and a small amount of the replacement capital projects. We've agreed to share other projects 50-50.

So, there's not really an easy answer for that but if you look from right now through 2022 when the conversion would be, under the joint venture agreement, to a straight 40%, after that it's a 40-60 joint venture sharing straight up, their projected cash flows --

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Pretty much offsets the CAPEX.

Richard Adkerson -- Chief Executive Officer

Offsets the CAPEX and those are going be based on whatever copper prices there are.

Alex Hacking -- Citi -- Analyst

OK, thanks. That's clear. I'll let somebody else ask a question now and hop back in the queue but thank you very much.

Richard Adkerson -- Chief Executive Officer

OK, Alex, thanks.

Operator

Your next question comes from the line of David Gagliano with BMO Capital Markets. Please go ahead.

David Gagliano -- BMO Capital Markets -- Analyst

OK, great. Thanks for taking my questions. Just stepping back for a minute. Obviously, the balance sheet is significantly better than it was.

Stabilization in Indonesia at least seems to be heading in the right direction. And quite a bit of free cash flow generation potential. Way back when the management team and the board did pay out this free cash in the form of dividends, special dividends, pretty big ones [Inaudible] and obviously on this call, your opening remarks were really more focused on highlighting the projects. So, I have a high-class problem type of question.

As we go through '18 and '19, is the preference to spend that cash on developing projects or are there also thoughts toward giving some of that back to the shareholders?

Richard Adkerson -- Chief Executive Officer

These projects are very long-dated, Dave, I think, as you know. So, we're not likely to be spending significant amounts of capital on these projects in '18 and '19. We're now building into our CAPEX numbers. This Lone Star project is a good project but not huge.

So, with positive cash flows, my expectation is, this is a board decision and we're talking with the board and it's emerged pretty quickly with the copper price coming back so quickly and so forth, but my expectations are that we would be looking at our long-term tradition of returning cash to shareholders.

David Gagliano -- BMO Capital Markets -- Analyst

OK, that's helpful. Thank you.

Richard Adkerson -- Chief Executive Officer

We're going to be very disciplined about all these projects. They're big, they're low risk, but there's still risk to the global economy, as we all know, and we're going to keep our finger on it, see how it's progressing, how China's doing, how the rest of the world's doing but my expectation is we're going to be generating cash and I believe our board will be predisposed to return it to shareholders when we can.

Operator

Your next question comes from the line of Matthew Korn with Goldman Sachs. Please go ahead.

Matthew Korn -- Goldman Sachs -- Analyst

Hey, good morning, Richard and Kathleen. Thanks for taking my questions. At Grasberg, operational question. Given all the challenges over the last several quarters on the production side, maybe you can remind us, if nothing would change from the current situation with the government, when would Rio's 40% stake kick in? Would that be '22, '23 now? And then once the whole block cave is ramping and you're deep into maybe the next decade, everything's as it should be, what kind of production delivery costs would you expect once we're there and solidly underground?

Richard Adkerson -- Chief Executive Officer

OK. So, the answer to the first questions is 2022 and sort of when in 2022 ais t the margin, could vary, but it's going to be expected to be then. And our net cash cost at $1300 gold and current levels of production is going to be in the neighborhood of --

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Low $0.50 a pound.

Matthew Korn -- Goldman Sachs -- Analyst

OK. All right, got it. And then another thing that's come up as we talked to a lot of companies is that now that there's no tailwind from currency, from oil, other kinds of improvements, other kinds of help on the cost side, people are worried about wages, they're worried about labor, they're worried about capital goods. I'm curious as you outlined your capital spending over the next couple of years, how much of that is on yellow goods and how much of that would be exposed to, say, pricing that's not completely locked up or PPI-linked or you still don't all complete visibility there?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Well, we do have in our capital plans maintenance and replacement of trucks. We tend to do a lot of truck rebuilds ourselves with our dealers on parts, and in our sustaining capital, a significant portion of that includes maintaining our equipment and replacing our equipment. We are seeing some cost inflation, you can just watch the oil price, and we're seeing some cost inflation from oil-related prices but our team is very focused on being very disciplined about spending money, both operating and capital, and timing it in a way that we're not in a rush to get the equipment. We'll do it in a smart way and be disciplined about, again, just trying to use what we have on hand and the new stuff that comes in, just being disciplined about that timing of purchases of that equipment but there is some cost inflation that's coming through, both on operating and capital.

Richard Adkerson -- Chief Executive Officer

Yeah, there's definitely some correlation between some of your equipment cost and copper price. I mean, we got trucks in Indonesia, in New Mexico right now and more on the way. When was the last time we bought a U-Haul truck? 2008 was the last U-Haul truck. Last U-Haul truck we bought was 2008.

So, we're having a great experience with this rebuild program, working on extending tire lives. I mean, it's a constant deal. We meet as the senior management team with our mine operators the week before our earnings call and this relentless effort these people have to try to find ways of offsetting cost increases with efficiency gains is really remarkable. I mean we use a lot of diesel but power for many of our operations comes not from petroleum.

Anyway, we're going to offset a good bit of that but it's going to be a factor for the industry. I mean, lots of years we've been Caterpillar's biggest customer. I had a chance to glance over their earnings release early this morning. I mean, you can just see what's going on.

And labor issues will be an issue and one of the things in terms of the industry is, next year there's a lot of labor contracts coming up, this year 2018. This year there are a lot of labor contracts in Chile and Peru coming up and you can expect those negotiations to be challenging and it could be supported from a supply standpoint. So, Codelco has a real challenge in maintaining production. All these things are challenges for the industry but they're supportive of supply.

Matthew Korn -- Goldman Sachs -- Analyst

Got it. Thanks for the comments, folks. Good luck with everything.

Richard Adkerson -- Chief Executive Officer

Thanks, Matt.

Operator

Your next question comes from the line of Andreas Bokkenheuser with UBS. Please go ahead.

Andreas Bokkenheuser -- UBS -- Analyst

Yes, thank you very much. Just a question on Grasberg there as well. You mentioned that the Indonesian government has agreed to pay fair-market value [inaudible] divestment at fair-market value. It always seemed that they did agree to fair market value but their fair market value estimate was always much lower than yours.

Would you say that effectively you have now agreed on a fair-market value for the divestment or are you still somewhat apart on that issue? That's the first question.

Richard Adkerson -- Chief Executive Officer

So, one thing, those of you who are veterans at this know this, there are lots of things that come out in the Indonesian press that are comments by people either in government or in business who are not directly involved in the process. So, be cautious in overreacting to things that you might see that are said. Now, we have not had a negotiation involving an exchange of values and so forth with the government of Indonesia on divestment values. What we have agreed to is a recognition that the standard for those negotiations would be, as they are in all of the negotiations that we have, standards related to the way resources are valued in the global market.

So, this idea of limiting the valuation to 2021 when our primary term of our contract ends, or saying you don't take into account reserves and so forth. All of those things are not part of the discussion any longer. The government has appointed internationally known financial advisors to work with them in this process and they're being engaged and it's being additive to the process. So, while we have not negotiated value, this issue with our joint venture partner really changes what that divestment obligation from Freeport would otherwise be.

And so, that negotiation is of much less significance to us than it would be if we were having to divest 51% of the [Inaudible]. So, all of that is in play. All of us had hoped that this would progress more by the end of 2017 but the government concluded they needed to go through a due diligence process and we're working very cooperatively with the government and its advisors on that process right now. So, while we can't say that there's been this give and take or specifics on values, I do feel comfortable that the values that will be negotiated will be reasonable.

Andreas Bokkenheuser -- UBS -- Analyst

Thank you. That's very clear. Just a second question, just to talk about something other than Grasberg, in your Americas operations, we did see a bit of a drop in [Inaudible] rates and recovery rates as well which is something you had guided for before. Can you give us a sense of, is this mostly just one-off or is there sustainability to it on the operational side.? Thank you very much.

Red Conger -- President and Chief Operating Officer -- Americas

Yeah, Andreas, this is Red. We did have lower recovery primarily at Cerro Verde. In the last quarter, we took more out of stockpiles in an area in the mine where the material had been oxidized but it didn't recover as well. We don't see that as an ongoing thing in the future.

We've also got through changes in mining rights and those kinds of things right now that are making the numbers jump around a little bit quarter to quarter. That's all going to even out as we go forward.

Kathleen Quirk-Executive Vice President and Chief Financial Officer

As we look at the guidance going out for the Americas business, our numbers are relatively flat in terms of copper production and that's sustainable over several years.

Red Conger -- President and Chief Operating Officer -- Americas

Over several years. I mean, it's not big numbers but we're bringing up the Sierrita] mine and with higher moly prices, its cost structure is attractive and [Inaudible] and El Abra, where we curtailed production -- we curtailed production at both those operations when prices dropped lower. Building those back up and then coming into play over time will be this Lone Star project, which has cost structure that's right in the neighborhood of our current level of cost structures.

Andreas Bokkenheuser -- UBS -- Analyst

That's clear. Thank you very much.

Operator

Your next question comes from the line of Chris Mancini with Gabelli and Company. Please go ahead.

Chris Mancini -- Gabelli and Company -- Analyst

Hi. Thanks a lot. Just a first quick question is just relative to this potential framework that you're talking about with Rio Tinto and the Indonesian interest having that 40% stake post-2022, just to be clear, so even if something were to be agreed to, say, in the next few months, Freeport would have the right to 90% or 90.5% of the economics of Grasberg until 2022 or whenever the Rio stake would kick in, right?

Richard Adkerson -- Chief Executive Officer

Now, that is not a certain percent. That varies because of this metal strip concept that was a part of the original contract but what I'm saying is that we have an understanding that we will maintain the economics for Freeport that's embedded in the current joint venture structure. And there's structures that might change, how that's done but we reviewed that, we had very good discussions with the Indonesian, explained it them, explained how important it is to us because we worked all this time to build it from this period. And so, they understand it and we have an understanding that our participation will not be diminished in the event of their acquisition of Rio Tinto interest.

Chris Mancini -- Gabelli and Company -- Analyst

OK, great, thanks. And just a quick question about Lone Star, so you've made the decision to proceed with the project, $850 million and it's around 200 million pounds of copper a year, could you just maybe describe your thought process relative to how you think about approving certain projects relative to the IRR or the NPV of the project and what copper prices you used and just generally speaking how you evaluated the decision to invest the capital on that project and maybe how that might apply to say your next project like El Abra or something like that?

Richard Adkerson -- Chief Executive Officer

Well, it was a much easier decision, let me just say, with Lone Star than the next decisions will be and that's because we had these unused, underutilized processing facilities at the Safford mine that was nearby. So, we didn't have to invest in a new SX-EW facility and so forth. So, it was a pretty straightforward deal. This is near-surface oxide material.

You just need to determine how you'd mine it, how you'd transport it to the facility, the rates of return are very attractive, and it had the added benefit, as I said, of then exposing the sulfide ore which would give us an option for future development. Around the world today, a lot of the newer deposits, most of the significant oxide projects have been developed. So, you're looking at sulfide deposits and frequently you're faced with a very large expanse of stripping those to have that opportunity. Here our stripping is going to generate positive return for us.

It's going to add volumes, attractive cost and serve for the stripping thing. So, it was an easier decision. In looking at projects in general, we don't focus on any particular price. Now, reserves are based on a $2 price.

We talk about changing it but that's kind of a regulatory-disclosure issue and there's no sense in going through a huge internal exercise of raising the copper price to $2.25 to $2.50 but when we come down to really thinking about investing in El Abra or in Lone Star sulfide or a Bagdad sulfide or the next step at Morenci, we look at an array of prices and not just how that fits in with that project but how it fits in with our overall portfolio. So, we think how would we manage this if things got tougher after we'd spent the capital? Can we deal with it? And then we have a positive long-term view of copper. So, we want to take advantage of this. So, we have the optionality of having these big projects to participate in the long run.

So, I'm kind of like that ad for the insurance company, the Farmers' Insurance company. I know a thing or two because I've seen a thing or two, and my experience has been when companies get too formula-driven about hurdle rates and prices and things like that, there's another saying I have around here is "Figures don't lie but liars figure." So, if you get too structured like that, people are going to play the games with you and sometimes not intentionally to come up with something that meets those formulas. So, we go away from formulas. We work together.

What I love about our team is we're not negotiating between operators and corporate. Kathleen works with her team hand in hand with these people, with our team as we're working and looking at this. Then we think about, "K, we expose this capital, what risk are we taking for the company going forward? How does it fit in with the rest of our assets?" That's why we felt so good about the Tenke project. It was high-risk, high-return deal when nobody else was going into the Congo.

We didn't give any value to it when we bought Phelps Dodge. I wish we still owned it but we did get almost $3 billion of value created. We started this in early 2008. So, given the financial crisis and what's happened with commodity prices, it was a good deal but we recognized it was very high-risk because of the political situation, the nature of the ore body and the mineralization, which was different than others.

So, it is much more of an interactive process we have than something that's formula-driven.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

And the Lone Star project fits right into our strength in terms of the geographic footprint where we're already operating, a lot of synergies of the Safford team, with the Lone Star team. And one of the big things we look at in qualifying projects is the size of the resource and the life of the project. And just because something has a high NPV but it has a short life, it's not something that we are excited about exposing dollars to. It's more of multiples of NPV that you can get over a long period of time.

So, that's really something that excites us. And looking at the range of copper prices, it's like with Lone Star, just for the oxides had a break-even of 240 with an 8% return with a lot of exposure to higher prices but also exposure to the big resource that Richard talked about earlier.

Chris Mancini -- Gabelli and Company -- Analyst

Sure, OK, all right. So, Lone Star really is just low-risk from a jurisdictional perspective, from a technical perspective, and it just provides you with lots of optionality to the upside. So, it just made sense to spend that capital and then as these other projects kind of become available, you just have to weigh all those different things in terms of the risk to completing it, the risk to operating it, the optionality and what not.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Exactly.

Richard Adkerson -- Chief Executive Officer

You got it.

Chris Mancini -- Gabelli and Company -- Analyst

OK, thanks a lot, guys.

Operator

Your next question comes from the line of Michael Gambardella with JP Morgan. Please go ahead.

Michael Gambardella -- JP Morgan -- Analyst

Yes, good morning, Richard and Kathleen. Couple of questions on Grasberg but first just congratulations on de-risking the balance sheet, and all the work over the last couple of years has been significant. Back to the Grasberg, I just wanted to clarify I think what I heard you say before. So, in terms of your agreement with the government right now, has the government formally agreed that if your stake were to go under 50% that you would still maintain operating control?

Richard Adkerson -- Chief Executive Officer

Yeah. Well, Mike, I want to be clear about this. In some ways I'd like to just say we're working on this and defer comments, but I know we're just not in a position to do that. We're not in a position to do it with people who follow us and our shareholders, and the Indonesian government has to respond to their parliament.

So, we all have constituencies that we have to talk about these things when things aren't finally complete. I've tried to use the word "understandings," because while we did agree on a framework, we don't have formal agreements with the government yet and there are still issues under discussion and we've been very clear on our position. We believe we have gained a degree of understanding from the government but there are different views within the government's team and the government itself. So, this issue of control is one that's very important to us just because of the factors that I mentioned earlier, the nature of the project, the importance of having a disciplined investment in this underground.

Without having a disciplined approach to the underground investment, the value of this asset dissipates. Because this is -- you know well, Mike, when you're dealing with these big projects and particularly block cave project, you have to follow a plan and stick to it and deal with it long term. So, the main thing that we're saying is, we have to be able to sustain that approach to investing and running this business. It is unusual but not -- but there are other limited cases of where investors own more than 50% of an asset economically and control is transferred to a minority owner.

That's complicated and all that hasn't been worked out yet. So, I don't want to say that that we have a formal agreement with the government on that and, again, you'll see comments on that in the press that talk about that. We are committed to have a very successful partnership with the government, with their state-owned company. We pointed to them what good partners Freeport has been in all of our operations whether it's our multiproject partnership with Sumitomo, with our partnership with Lundin that we had in the Congo, with various partners we have in Cerro Verde, with a partnership with Codelco in Chile.

I mean, we do a lot of work with Rio Tinto. We've had an excellent partnership with Rio Tinto and the government really recognizes our operating capabilities and the need to have us to continue. So, there's no question about that. It's the issue of how we work together in developing corporate policies and capital allocation, financial policy, purchasing policy, environmental, all those things that are so important to success in the operations.

So, Mike, that'll be part of the final agreement and that's where we stand right now and that's what our position is.

Michael Gambardella -- JP Morgan -- Analyst

From an economic standpoint, let's just assume Rio Tinto signs a deal with the government. Is it your understanding that from an economic perspective, aside from the smelter, [Inaudible] is it your understanding that the economics of your agreement [Inaudible] same as they are today and there's no change? Is there anything else that would [Inaudible]?

Richard Adkerson -- Chief Executive Officer

Yeah. We have had good discussions, we spent time explaining this and so forth. So, the acquisition of the Rio Tinto interest would not change our economics. Now, in the framework for reaching the long-term agreement, we have said that we would agree that the government's financial benefits from the project will increase.

These things may be reshuffled and reorganized in certain ways, but at the end of the day, the government will be able to say to the people of Indonesia they've negotiated a larger participation and in that larger participation would come through the fact that we are paying higher royalties than under the cap. And in fact, we've already been paying these higher royalties since mid-2014 but the royalties would be, they use a term more than we do, but royalties would be nailed down. In other words, we will agree on the royalties today and that would be the royalties for the remainder of the project. We agree on tax elements.

Now, we made a lot of progress in this by defining them. We agree on local taxes and fees. All that would be nailed down.

Michael Gambardella -- JP Morgan -- Analyst

Final question on Grasberg. [Inaudible] give a feel for after-tax situation. I thought you [Inaudible].

Richard Adkerson -- Chief Executive Officer

Mike, you were fading out, so if I don't cover your question, come back and ask me to fill in. So, the way that our tax situation has been structured, I mean, FCX is a U.S. company, then we operate in these countries where we have mines through entities in those countries and those entities are subject to taxes and royalties in those countries. Then, under the previous tax law, you would consolidate all of that into a U.S.

company and you'd have a consolidated tax calculation but you'd get foreign tax credits for taxes that you pay internationally. And there's limitations on that, there was this alternative minimum tax calculation that would come into play but then you would calculate a U.S. tax on the basis of that consolidated results. Now, in the new tax laws, they've gone to a territorial system.

And so, now, in large part the U.S. taxes will be based on the taxes for the income you generate within the U.S. And within the U.S. we have a very large loss carry-forward.

We also have the benefit of percentage depletion, which was left in the law, and the AMT was repealed. So, we will have no taxes for as far as you can see in the U.S. We will continue to pay the taxes in these individual countries based on their own tax laws and our stabilization agreements and so forth.

Michael Gambardella -- JP Morgan -- Analyst

Thank you, Richard.

Richard Adkerson -- Chief Executive Officer

Did that cover it, Mike?

Michael Gambardella -- JP Morgan -- Analyst

Yeah, that covers it. Thanks.

Operator

Your next question comes from the line of Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good morning, everybody, and congrats on the progress in Indonesia. I, unfortunately, was on another call earlier and this may have been addressed but I wanted to touch on it. I remember that they were export royalties in place while you were negotiating the new structure in Indonesia and I wonder to what extent is that currently being covered in the negotiations? And, Kathleen, when you gave the $0.50 per pound cost guidance for, I think, 2022, would that include all of those royalty costs in case they're even applicable?Thank you.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Yeah. Well, we are paying export duties currently and those will phase out once the smelter gets to a certain percentage. So, post-2022, we have the new smelter completed in that time frame and all of the concentrates will be treated domestically and there won't be a need to export concentrates and there'll be no duty, but we do have duties in our current guidance for 2018 and 2019.

Lucas Pipes -- B. Riley FBR -- Analyst

And could you remind me about approximately what amount per pound those duties are?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Well, just on the export volumes we're paying roughly 5% currently and I may not be able to follow up on the exact numbers but in our operating summary, we paid $0.34 cents and that included loyalties and export duties. So, we will get to the breakout.

Red Conger -- President and Chief Operating Officer -- Americas

Lucas, you may understand this but just to be clear for everybody, roughly 40% of our production in a Grasberg is processed at the PT smelting facility at Gresik that we built in the mid-'90s in partnership with Mitsubishi and other Japanese investors. There's no export duty on that. It's only on exports. And in your question you were talking about royalties and export fees.

I mean, we do have a royalty that's assessed on all the production and it's unrelated to exports and then there's, we call it an export duty, which has been the item of controversy that we've had over the last 3 1/2 years.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

But the export duty that's in our numbers for PTFI is just under $200 million for 2018.

Lucas Pipes -- B. Riley FBR -- Analyst

Very helpful. Thank you. Then maybe just to tie up some loose ends. I recall there was a $350 million Cerro Verde royalty dispute.

Has that been settled? Could you give us an update on that?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

There's really no update from our third-quarter release. We are continuing to work with the government officials on a settlement that would waive penalties and interests associated with that dispute and those discussions are ongoing but there's no update at this time.

Lucas Pipes -- B. Riley FBR -- Analyst

All right. Well, I'll leave it here. Thank you very much and good luck.

Richard Adkerson -- Chief Executive Officer

And, Lucas, that $200 million would reduce our taxable income. So, that's a pre-tax number.

Operator

Your next question comes from the line of Michael Dudas with Vertical Research. Please go ahead. Michael, your line may be on mute.

Michael Dudas -- Vertical Research -- Analyst

Thank you. Thank you very much. Richard, just wanted to follow up on your thoughts on the transition from the pit to underground. You seemed much confident about out that and de-risking.

What are some of the obstacles that you achieved and what are some that we may look for as we look into the fourth quarter of 2018 into the first half of 2019 on the progress and the flow?

Richard Adkerson -- Chief Executive Officer

All right. So, that's why we added this slide. I think it's the first time we've used it. What was the slide number?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

On the milestones?

Richard Adkerson -- Chief Executive Officer

Yeah on the milestones?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Slide 19.

Richard Adkerson -- Chief Executive Officer

Look at slide 19. Mark, do you want to --

Mark Johnson -- President and Chief Operating Officer -- Indonesia

Yeah a lot of the challenge in the Grasberg block cave, the [Inaudible] system, as Richard indicated, the rail system is ready to be commissioned. The crushers are already in place. The conveyors will be complete all the way out to the mill in May. So, we'll have six months there where we'll be able to just convey development muck, which is significant.

We're mining about 6,000 to 7,000 tons a day right now just in developing drifts. The access to the ore body is extensive and the undercut, the extraction level, we've got the surface level, the ventilation's in place. All the pieces are there. What we're going to start doing in the late fourth quarter is that we'll start blasting in the undercut and then in the beginning of 2019 we will taking drawbells and actually start pulling material.

The cave should develop very quickly. The area in which we're initially developing the ore body is in a very capable portion of the deposit and at that point when we start that, the pit will be essentially done. There's a little bit of n overlap right now that we reviewed with our consultants. We feel that there can be like a three-month overlap of ongoing pit operations while block cave, some of this blasting, the initial starting with the block cave to go on without any impacts.

We've got a very good plan for managing the water from the pit. We've been able to demonstrate that we can get the water out of the pit before the cave starts up. So there's a whole network, there's a whole list of things that we've been checking off over the last year and a lot of it's been really just getting these meters of development. We did over 30 kilometers of development last year.

That drops down a little bit this year as we get the ore body developed. So we'll be doing about 2,200 meters a month and all of that just is moving along very well.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

And the big deal in 2018 will be the installation of the ore flow and the rail.

Mark Johnson -- President and Chief Operating Officer -- Indonesia

That's right. The shaft is commissioned. We're using that for people. So, all these projects are all starting to come together.

The big one'll be the ore flow system, getting that, and we're doing that a little earlier than what we originally planned and that's just to get the congestion out of the underground. It'll be a much more efficient way of getting development muck out and getting men in and material in.

Michael Dudas -- Vertical Research -- Analyst

Right. That's very encouraging. Thank you for the update. And my follow-up, Richard, is I think we all are on the call hoping someday this conference call will be little less detailed on negotiations with Indonesia, etc.

If something comes together, however it comes together, how do you think it's going to be announced and what's the time frame from, say, if it was announced tomorrow, how long would it take to get everything cleaned up and were there certain deadlines, etc., how long of a process and how clean of a process do you think it will be, if you can speculate toward the conclusion of this de-risking?

Richard Adkerson -- Chief Executive Officer

Sure. And, Michael, you're talking about milestones. I have two personal milestones I'll share with you. One is when Freeport starts paying dividends again and two is when I can take a group of analysts and shareholders back out to Grasberg to see the place.

This underground mine, Mike Gambardella, you remember trip we had a number of years ago out there, but this underground mine is really spectacular. I mean, it is not like anything you would think of as an underground mine but it is like a major manufacturing facility to see.

Michael Dudas -- Vertical Research -- Analyst

Those are great milestones.

Richard Adkerson -- Chief Executive Officer

Yeah. Actually, given the authority that the president has given his ministers, reaching agreement is the key and documenting things we've already worked on. I mean, we've gotten the form of the IUPK we're working on. There's an attachment.

They're coming up with a structure to assure us that it can't be changed by future laws and regulations. So there's not gonna be -- this is something that the government is authorized to do under current laws. So, it will not require changes to their laws or the involvement in the parliament of changing laws. The parliament will be informed and involved from that standpoint but once the agreement's reached, the process of getting it documented will be straightforward and not time-consuming.

Michael Dudas -- Vertical Research -- Analyst

Excellent. Look forward to those dividends. Thank you, Richard.

Operator

Your next question comes from the line of Novid Rassouli with Cowen and Company. Please go ahead.

Novid Rassouli -- Cowen and Company -- Analyst

Hi, Richard and Kathleen. Thanks for taking my questions. Just two for you first on Indonesia, the ongoing due diligence related to Indonesia potentially purchasing your JV partner's share, does that have the ability to potentially delay Freeport's goal of having an agreement here on the longer-term contract in first half of 2018?

Richard Adkerson -- Chief Executive Officer

No, the time frame of the first half, which has really been set more by the government, is to allow for that due diligence. So, we had all hoped to have more formal agreements reached by the end of the year but there was a decision having the need for this due diligence and that's why the target of midyear has been put in place to allow for that due diligence.

Novid Rassouli -- Cowen and Company -- Analyst

Got it, makes sense. And then my second question, I don't think anybody's really talked to or asked about the broader copper markets. I'm going to go ahead and do that now. So, based on the lack of investment over the past few years as you highlighted in the past few calls, what year do you expect the copper market to reach kind of peak tightness or deficits, I mean, in the coming years before maybe reaching an inflection point? As you said, we're kind of getting close to that 325 that you said is necessary for people to have the incentive to start investing.

Haven't really seen anything incredibly material yet. So, just wanted to get a sense of how you're seeing the next few years and when we reach that inflection point. Thanks, Richard.

Richard Adkerson -- Chief Executive Officer

All right. Thank you, Novid. You tell me what global growth's going to be. You tell me what China's going to be, because my view is the supply side of this, subject to the uncertainty about disruptions, which could only be supportive of supply -- they're not going to add supply but they could take it away -- is pretty clear-cut at this point.

Surprises will be on the negative side. You're not going to see somebody say in the near term, "We've got significant amounts of new production and nobody knew about it." People'll work to, at the margin, increase production but it's just going to be at the margin. And you look at the long-term projects that are out there, whether it's resolution of Olympic Dam, our big projects that we're talking about, El Abra and others, there'll be more copper coming out of Africa, I believe, based on our experience there, but that's going to unfold over a number of years because of the nature of the mineralization and how it has to be mined. You look at the experience of Oyu Tolgoi.

It's a great resource, great ore body but the number of years that it's taken to ramp up and the continuing issues they face with border crossings and power and the government. I mean, that's just fundamental to all these big projects. So I think you can get your arms around supply outlook relatively easy and then you plug in your own view about what you think the global economy is going to do. I just went back to Houston this week to give a luncheon address, not to a mining group but to a general business group, and of course, it took me back after living in Houston for so long.

Back in my earlier career one of my first clients was Mitchell Energy, which kind of kicked off the shale industry in the mid 1980s and the oil and gas people were asking me, "Is there anything like shale for the copper business?" because nobody expected the U.S. to bypass Arabia and Russia and to produce 12 million barrels of oil a day. I mean, back in the '80s we were thinking of importing 75% of the oil and production dropping to 4 million barrels, but the great thing about copper, and take it with a grain of salt because you know my feelings on this, which have been the same basically since I became CEO in 2003, is its uses are just built into the economy in such a way that it's really hard to replace for its basic uses. You can do it for plumbing and things like that but when you look at the way the world's going with electronics, everybody talks about electric vehicles and that could be a big deal, alternative energy development could be a big deal but just how much electronics are increasingly built into our lives, whether it's communications or control systems, power delivery systems, the development of the world for basic things like refrigerators and air conditioners, maybe I shouldn't say washing machines, but in any event, it's just a commodity I think that is so well-situated for how it's used in the economy, but you're subject to the risk of the economy of China and the global economy.

But supply side, there's no shale copper coming on stream. People were talking about not mining in the ocean or on asteroids and things like that, but we're just seeing in terms of basic production the new projects are of major less quality than the old projects were. They have much lower grades. You have to do a lot more stripping, building infrastructure, getting water, getting power, all of these things make the supply side of copper, I think, extraordinarily well-supported.

I tell people today we could increase the price of copper to $6 a pound overnight and we have, what'd I just show, 300 billion pounds of undeveloped copper resources. We could not bring them on stream to five to 10 years from now, even with $6 copper. So, it's a great commodity and that's why I like where our company is.

Novid Rassouli -- Cowen and Company -- Analyst

Thanks, Richard.

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Operator, are there any more questions? Hello?

Richard Adkerson -- Chief Executive Officer

We can't seem to get to the operator. So, I don't know if everyone else is still on the line.

Operator

Can you hear me?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Yes, we can.

Operator

OK, we had an issue in the call center. I do apologize. Our next question will come from the line of Piyush Sood with Morgan Stanley.

Piyush Sood -- Morgan Stanley -- Analyst

Hi, Richard and Kathleen. Thanks for taking the question. First one, at Grasberg it seems like total CAPEX to be spent over the next five years may have declined to about $900 million from $1 billion. Just want to understand if that's a rounding error or is there something else over there?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

No, there really wasn't anything. It was just the time period of the five years that we included in last quarter versus this quarter and the way the rounding's out. So, no material differences in our plans.

Piyush Sood -- Morgan Stanley -- Analyst

All right. And staying with Grasberg, labor relations at Grasberg seem to have improved. Could you comment on maybe worker productivity, how you're taking care of expectations around employment as you move underground and when we could expect a new labor contract?

Richard Adkerson -- Chief Executive Officer

OK. So, we signed a new labor contract in December. That's for two years. Under Indonesian law we have to do a new one every two years.

So, we have signed it. Mark, I'll let you make some comments because you live with this thing.

Mark Johnson -- President and Chief Operating Officer -- Indonesia

Yeah. Well, 2017 was a very dramatic year on the labor. In February we had 32,000 employees, that's a combination of employees and contractors. With the export ban, we had some cost reductions that was kicked off with a 10% employee-furlough program.

After we started that program, we had a number of employees that went on an informal strike. It was not a legal strike. They started missing work and with the labor laws in Indonesia, they essentially resigned their positions, and that resulted in about 5,000 employees leaving. We since have added back about 4000 contractors.

So, we went from 32,000 to 24,000 and now we're back up to around 28,000. The PTFI component of that is under 8,000 employees now, it was 12,000. The contractors that we've hired in have been very cooperative, been very energetic. We've had a very good response.

As kind of a byproduct of the new guys coming in, our PTFI work force has also picked up the efficiencies and we're seeing a much-improved morale, our safety. With all of that transition, we have the lowest incident rate for our reportable accidents that we've ever had since the beginning of the project. So, we feel good about the status of our labor force, the composition of contractors and internal employees, and really the effectiveness of our supervisors under kind of a new composition of labor. As Richard said, there was a lot of transition within the labor unions that we've dealt with.

Their leader had been removed. He had some legal issues. He's out of the picture. The new team that's come in has worked very closely with us.

There's a second union that we're dealing with. That was kind of a new component of our negotiations this year but all of that worked out. It went on a little bit longer but we didn't have any threats of strikes, we didn't have any concerns that the work force was going to have any sort of a walkout. So, during that whole period of negotiation, we didn't see an interruption in our production and it allowed us to focus on safety and bringing these guys on and focusing on the project.

So, we saw some benefits in there. For instance, in the Grasberg pit our unit rates went down by about 30% in the fourth quarter to what they had been in the first part of the year. So, we've seen some efficiencies. We're getting more out of each worker and that's also gone into, on the development side, then into the capital projects.

So, we feel well-positioned in 2018 with the growth that we have.

Richard Adkerson -- Chief Executive Officer

And for years we've been planning for this transition because it is new skills, new work requirements, and so forth in the underground from the open pit without the drivers with the haul trucks and the big electric shovels, and so forth but we've been doing that and it's much more mechanized. So, anyway, that's all progressed very well.

Piyush Sood -- Morgan Stanley -- Analyst

That's helpful. And, Kathleen, you did comment on the long-term cost factor for Grasberg at about $0.50? Just want to understand, as we go into a transition in 2019, is there kind of first step-down coming in your total cost over there or should we kind of expect that cost to go up drastically on a per-pound basis or do you have some control around that?

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

In terms of absolute cost, we are not anticipating any significant changes on a unit basis or a metal basis. It will depend on the volumes and the grades that we're mining. So, in 2019, as we get into a lower year, we will have higher cost than what we had in 2018 but it is still very, very attractive and on a unit basis our lowest cost mine in the company. So, as we go forward, we start to improve on the volumes after 2019 and the cost position goes down as a result on a metal basis per unit but in terms of absolute costs, we're not expecting to have major changes in the absolute total cost of the operation.

Richard Adkerson -- Chief Executive Officer

Generally, our costs are fixed. There's some things that vary. So, when Kathleen's talking about costs going up, it's unit cost going up. Absolute costs we'll continue to manage, to keep as low as we have, but for the most part, that's fixed.

Piyush Sood -- Morgan Stanley -- Analyst

That's very helpful. Thanks so much for the color.

Richard Adkerson -- Chief Executive Officer

All right, thank you. So, let's have our last question and appreciate, I think, it was Michael who was saying he looks forward to when we don't have to talk so much. Nobody looks more forward to that me.

Operator

Our final question will come from the line of -- [Audio cut off]

Duration: 114 minutes

Call Participants:

Kathleen Quirk -- Executive Vice President and Chief Financial Officer

Richard Adkerson -- Chief Executive Officer

Alex Hacking -- Citi -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

Matthew Korn -- Goldman Sachs -- Analyst

Andreas Bokkenheuser -- UBS -- Analyst

Red Conger -- President and Chief Operating Officer -- Americas

Chris Mancini -- Gabelli and Company -- Analyst

Michael Gambardella -- JP Morgan -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Michael Dudas -- Vertical Research -- Analyst

Mark Johnson -- President and Chief Operating Officer -- Indonesia

Novid Rassouli -- Cowen and Company -- Analyst

Piyush Sood -- Morgan Stanley -- Analyst

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